Corner of Berkshire & Fairfax Message Board

General Category => Strategies => Topic started by: netnet on October 27, 2016, 01:12:36 PM

Title: Buffett's 50% per year on small sums
Post by: netnet on October 27, 2016, 01:12:36 PM
Recently, Buffett, talking about his salad days, said that he would guarantee that he could make 50% per year on 1 to 10 million (maybe 50, I don't have the direct quote in front of me).  I just came across a random podcast, that opined that Buffett really meant using control situations. Personally, I don't think that is what he meant, but I was wondering what some on the board think. (with only 1 million you are not going to have more than one control situation.)

Title: Re: Buffett's 50% per year on small sums
Post by: Jurgis on October 27, 2016, 01:25:57 PM
I think consensus is that 50% is hard to unachievable.

Arb? - not at this time.
Value stocks in foreign exchanges? - maybe. Doubtful you can get 50%, but maybe.
Moaty situations in small caps? - I doubt there's many (any?).
US micro/nanocaps? - If you select best ideas from CoBF and other microcap investors, yeah, you could make maybe 20-30% a year. I don't see 50%.
Distressed debt? - maybe, but situational. Picasso is da man.
Control situations? - really? from what I've seen here most of them are tough and rather crapshoot.
Spinoffs? - not really.

Am I missing any other ideas/areas?

Edit: I somewhat skipped really situational ideas like levered Florida houses in 2010 or so...
Title: Re: Buffett's 50% per year on small sums
Post by: augustabound on October 27, 2016, 01:49:05 PM
From the 2005 Kansas U visit to Berkshire,

Quote
According to a business week report published in 1999, you were quoted as saying “it's a huge structural advantage not to have a lot of money. I think I could make you 50% a year on $1 million. No, I know I could. I guarantee that.” First, would you say the same thing today? Second, since that statement infers that you would invest in smaller companies, other than investing in small-caps, what else would you do differently?

Yes, I would still say the same thing today. In fact, we are still earning those types of returns on some of our smaller investments. The best decade was the 1950s; I was earning 50% plus returns with small amounts of capital. I could do the same thing today with smaller amounts. It would perhaps even be easier to make that much money in today's environment because information is easier to access.

You have to turn over a lot of rocks to find those little anomalies. You have to find the companies that are off the map - way off the map. You may find local companies that have nothing wrong with them at all. A company that I found, Western Insurance Securities, was trading for $3/share when it was earning $20/share!! I tried to buy up as much of it as possible. No one will tell you about these businesses. You have to find them.

Other examples: Genesee Valley Gas, public utility trading at a P/E of 2, GEICO, Union Street Railway of New Bedford selling at $30 when $100/share is sitting in cash, high yield position in 2002. No one will tell you about these ideas, you have to find them.
Title: Re: Buffett's 50% per year on small sums
Post by: Jurgis on October 27, 2016, 01:54:35 PM
Seems like US/foreign micro/nanocaps then. I'm still doubtful, but I'll let our nanocap experts to comment. ;)

Edit: just to counterargue a bit my claim

Quote
If you select best ideas from CoBF and other microcap investors, yeah, you could make maybe 20-30% a year.

people may not post best nanocap ideas due to low liquidity, building positions themselves.

OTOH, we'd still see post-mortem 50%+ claims perhaps. In reports, letters to investors, etc. IMO I don't see enough of them to agree with Buffett. But surely he knows better.  8)
Title: Re: Buffett's 50% per year on small sums
Post by: jmp8822 on October 27, 2016, 01:55:53 PM
Recently, Buffett, talking about his salad days, said that he would guarantee that he could make 50% per year on 1 to 10 million (maybe 50, I don't have the direct quote in front of me).  I just came across a random podcast, that opined that Buffett really meant using control situations. Personally, I don't think that is what he meant, but I was wondering what some on the board think. (with only 1 million you are not going to have more than one control situation.)

I'm not exactly sure how he would do 50-percent per year, but here is my strategy:

Concentrate your capital in your best couple ideas.
Use options if appropriate.
Pick stocks that you think are worth two times or more where they are trading today - ideally with some reason it might be more obvious next year what the company is actually worth.
Watch out for levered firms if you are concentrated.
Think of every idea as opportunity cost versus the other idea.

What this will lead to in your portfolio:

Higher average volatility than the market.
Potential large mark-to-market or permanent losses - not okay for everyone.

Bottom-line:

50-percent per year is possible if you are a good stock picker and concentrate your ideas.
Title: Re: Buffett's 50% per year on small sums
Post by: Jurgis on October 27, 2016, 02:01:03 PM
Just for fun, this deserves a poll.
Title: Re: Buffett's 50% per year on small sums
Post by: augustabound on October 27, 2016, 02:02:01 PM
Shai Dardashti followed up with a letter to Buffett.
He responded by basically saying his Daehan Flour example from South Korea around 2006 would be what he would do today.
IIRC, it was selling at about a 2 or 3 PE. Stable, boring business etc.
Title: Re: Buffett's 50% per year on small sums
Post by: Picasso on October 27, 2016, 02:06:04 PM
I think it's very possible to do 50% on $1-10 million without options, warrants or margin.  It takes some concentration and sucking up lots of volatility, but I think some have the mental and emotional capacity to do it.  I know people who put up those numbers but it takes unusual skills and mindset.  You'll know those people when you meet them.  They're just wired differently and can easily breakdown complex situations or remain level headed in almost any market condition. 
Title: Re: Buffett's 50% per year on small sums
Post by: Jurgis on October 27, 2016, 02:09:37 PM
Poll posted at http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/i've-had-50-annualized-returns-for/ for resident Buffett wannabes ... and regular people too.  8)
Title: Re: Buffett's 50% per year on small sums
Post by: rukawa on October 27, 2016, 02:21:51 PM
Supposedly negative enterprise stocks do get 50% a year over the period from 1972-2012:
https://blogs.cfainstitute.org/investor/2013/07/10/returns-on-negative-enterprise-value-stocks-money-for-nothing/
which is 40 years long.

Not sure how replicable this strategy is. Also not sure if the result is real. But its pretty interesting. At the time Buffett did this he was definitely a Grahamite. So its not a quality based strategy. Its really just incredibly deep value. Buffett also most certainly did not mean control situations since at this time he didn't have large enough sums to control anything. I think that over the short term you also have to be lucky with timing...you really need to have a booming economy. A deep value strategy won't work well during all time periods.
Title: Re: Buffett's 50% per year on small sums
Post by: InspireByReason on October 27, 2016, 02:25:55 PM
Well I don't have a huge dataset to show off with but so far I'm hovering around the 50% gain mark for my first year with a highly focused deep value portfolio. I think to do what I do you have to either be extremely confident and/or insane. I haven't been able to figure out which one it is yet.
Title: Re: Buffett's 50% per year on small sums
Post by: Gregmal on October 27, 2016, 02:50:35 PM
Maybe for a few years but I'd imagine if you did it long enough you'd run into the same issues Buffett is talking about. That said I just don't see how this can be done through investing, especially in an environment like this one. Definitely possible, although still incredibly difficult, if you're trading actively though.

Don't know if anyone here follows or what the consensus is on a fellow by the name of Timothy Sykes, but definitely using a strategy similar to the one he employs would give you the best shot IMO. Basically just taking advantage of less liquid or manipulated situations where the guy on the other end of the trade is not, lets be polite, a sophisticated investor.
Title: Re: Buffett's 50% per year on small sums
Post by: MG2014 on October 27, 2016, 03:31:40 PM
Have you considered that he wouldn't be investing in public markets at all with such 'small' sums? Maybe he'd do mini LBO's with small private businesses.
Title: Re: Buffett's 50% per year on small sums
Post by: Jurgis on October 27, 2016, 03:41:05 PM
Have you considered that he wouldn't be investing in public markets at all with such 'small' sums? Maybe he'd do mini LBO's with small private businesses.

I thought that was part of OPs question and two people gave answers from Buffett directly that he meant public markets...  ::) (though he might do both).
Title: Re: Buffett's 50% per year on small sums
Post by: rb on October 27, 2016, 06:40:14 PM
Hey, forget the 50%. I'd be happy as a clam if i could do 20% consistently. You can count me in the camp which doesn't think 50% is possible. But then I'm not Buffett. Here's my thoughts.

There are definitely a lot less of those companies out there today.
1. As Buffett said in that quote technology today made it really easy to find these companies so the market is a lot more efficient from that respect.
2. You have a ton of PE shops today that employ a lot of people to look for these companies and then snap them up.

If you're looking at small companies. Then they're probably not very good companies. Because the fact is that compounders compound so good companies tend to get big. So then you're looking at some special situations that are miss priced on an asset base. But if the companies aren't good then you need to get some control in order to release/realize the value. I don't know how you do that with 1-10 million given today's market caps. Maybe you find the company build a position and then release your research to PE shops press release style?

All that being said sometimes the market creates situations where you find good companies with the characteristics that Buffett talks about such as MSFT or CSCO circa 2011-2012. But that was a specific situation at a specific point in time. To say that there's always something like that going on is a big stretch imo.
Title: Re: Buffett's 50% per year on small sums
Post by: no_free_lunch on October 27, 2016, 06:56:44 PM
I am with rb, 20% would be great.

I think that if this was possible then you should be able to find evidence of people doing it.   Maybe not 50%, but I can't even find a fund that has done 20% over the past decade.  I am not sure what kind of opportunities there are in public markets for sub $1m that there isn't for say a fund with $50-100m aum so it seems you should be able to find an example.
Title: Re: Buffett's 50% per year on small sums
Post by: Uccmal on October 27, 2016, 07:48:10 PM
I am with rb, 20% would be great.

I think that if this was possible then you should be able to find evidence of people doing it.   Maybe not 50%, but I can't even find a fund that has done 20% over the past decade.  I am not sure what kind of opportunities there are in public markets for sub $1m that there isn't for say a fund with $50-100m aum so it seems you should be able to find an example.

The lack of someone actually doing it seems to suggest it is not possible.  Buffett is not the only investment genius and the entire field is vastly more competitive than 60 years ago (when Buffett incidentally wasn't doing 50%.) Between all these board members we would know someone who was doing this and we dont.   Occams Razor. 

I just looked up Buffetts compound rate of return from the start of the partnerships to their wind up and it was (only) 31.6%.  It didn't hurt one bit that he started at the exact start of the baby boom driven bull market, and the cunning bastard got out right before the crash. 
Title: Re: Buffett's 50% per year on small sums
Post by: Jurgis on October 27, 2016, 09:18:22 PM
The lack of someone actually doing it seems to suggest it is not possible.  Buffett is not the only investment genius and the entire field is vastly more competitive than 60 years ago (when Buffett incidentally wasn't doing 50%.) Between all these board members we would know someone who was doing this and we dont.   Occams Razor. 

Poll says that we have 3 people with 10 years+ of 50% annualized returns...  :o
Just sayin'

(OK, people could be trolling. And for 10 years answer I did not specify how the return should be calculated, and it's possible that the people voting have 50% annual returns interspersed with 50% losses in between. Or maybe we have 3 real Buffetts among us.)  8)
Title: Re: Buffett's 50% per year on small sums
Post by: rb on October 27, 2016, 09:22:38 PM
Well if that's true these guys should step into the light. If they're doing it with small companies we can even set up a CoBF cabal where we pull funds together and get sizable positions to extract value.  If the research is for real I'm down for at least half a mil a pop.
Title: Re: Buffett's 50% per year on small sums
Post by: Jurgis on October 27, 2016, 09:34:32 PM
Well if that's true these guys should step into the light. If they're doing it with small companies we can even set up a CoBF cabal where we pull funds together and get sizable positions to extract value.  If the research is for real I'm down for at least half a mil a pop.

It's also possible that someone started with 1K or 10K and now has 57K or 570K after 10 years.

Anyway, I'd be interested if some of these people stepped into the light. If they are interested in double confidentiality, I'd be happy to correspond via private messages and not disclose even their CoBF identities to others.
Title: Re: Buffett's 50% per year on small sums
Post by: oddballstocks on October 27, 2016, 09:58:18 PM


If you're looking at small companies. Then they're probably not very good companies. Because the fact is that compounders compound so good companies tend to get big.


I think this is wrong but taken as religion.  No, there are wonderful small companies, but they're stuck in a niche making excellent non-scalable returns.  This is what most successful businesses find themselves in.  They hit a growth ceiling, but can make phenomenal returns in their little niche.  These are indeed excellent businesses.

Everyone wants a Starbucks or Cisco.  But I'd prefer to own some company making oil filters that has fantastic profit margins, little competition but is limited in how they can grow.

We have a board full of dreamers who are planning for that one day when they're running $5b or $10b. 
Title: Re: Buffett's 50% per year on small sums
Post by: rb on October 27, 2016, 10:32:16 PM


If you're looking at small companies. Then they're probably not very good companies. Because the fact is that compounders compound so good companies tend to get big.


I think this is wrong but taken as religion.  No, there are wonderful small companies, but they're stuck in a niche making excellent non-scalable returns.  This is what most successful businesses find themselves in.  They hit a growth ceiling, but can make phenomenal returns in their little niche.  These are indeed excellent businesses.

Everyone wants a Starbucks or Cisco.  But I'd prefer to own some company making oil filters that has fantastic profit margins, little competition but is limited in how they can grow.

We have a board full of dreamers who are planning for that one day when they're running $5b or $10b.
You are 100% correct. I didn't want to get into all the nuances about business in one post. Of course this is what Berkshire initially set out to do. Solve that growth ceiling by buying companies with good ROIC by buying them and engineer growth by taking their cash flow and buy other like companies.

The issue with is that those kind of companies don't really have a reason to be public. Case in point, the companies that BRK bought were private. Now I'm sure that there are cases where these guys are not very good at corporate finance but I didn't say that there are no companies like that. My point was that they would be very rare and definitely not available all the time when one want to go shopping.
Title: Re: Buffett's 50% per year on small sums
Post by: kab60 on October 28, 2016, 12:04:22 AM


If you're looking at small companies. Then they're probably not very good companies. Because the fact is that compounders compound so good companies tend to get big.


I think this is wrong but taken as religion.  No, there are wonderful small companies, but they're stuck in a niche making excellent non-scalable returns.  This is what most successful businesses find themselves in.  They hit a growth ceiling, but can make phenomenal returns in their little niche.  These are indeed excellent businesses.

Everyone wants a Starbucks or Cisco.  But I'd prefer to own some company making oil filters that has fantastic profit margins, little competition but is limited in how they can grow.

We have a board full of dreamers who are planning for that one day when they're running $5b or $10b.
You are 100% correct. I didn't want to get into all the nuances about business in one post. Of course this is what Berkshire initially set out to do. Solve that growth ceiling by buying companies with good ROIC by buying them and engineer growth by taking their cash flow and buy other like companies.

The issue with is that those kind of companies don't really have a reason to be public. Case in point, the companies that BRK bought were private. Now I'm sure that there are cases where these guys are not very good at corporate finance but I didn't say that there are no companies like that. My point was that they would be very rare and definitely not available all the time when one want to go shopping.
If these businesses don't grow, why do you need high ROIC (unless it's because it implies a moat?) I get the attraction to cheap, no-growth companies in a nice niche, but isn't the problem typically that those cashflows don't all get returned (suboptimal capital allocation).
Title: Re: Buffett's 50% per year on small sums
Post by: Uccmal on October 28, 2016, 04:28:51 AM
The lack of someone actually doing it seems to suggest it is not possible.  Buffett is not the only investment genius and the entire field is vastly more competitive than 60 years ago (when Buffett incidentally wasn't doing 50%.) Between all these board members we would know someone who was doing this and we dont.   Occams Razor. 

Poll says that we have 3 people with 10 years+ of 50% annualized returns...  :o
Just sayin'

(OK, people could be trolling. And for 10 years answer I did not specify how the return should be calculated, and it's possible that the people voting have 50% annual returns interspersed with 50% losses in between. Or maybe we have 3 real Buffetts among us.)  8)

Extraordinary claims require extraordinary proof.  Non?
Title: Re: Buffett's 50% per year on small sums
Post by: DooDiligence on October 28, 2016, 04:43:49 AM
The lack of someone actually doing it seems to suggest it is not possible.  Buffett is not the only investment genius and the entire field is vastly more competitive than 60 years ago (when Buffett incidentally wasn't doing 50%.) Between all these board members we would know someone who was doing this and we dont.   Occams Razor. 

Poll says that we have 3 people with 10 years+ of 50% annualized returns...  :o
Just sayin'

(OK, people could be trolling. And for 10 years answer I did not specify how the return should be calculated, and it's possible that the people voting have 50% annual returns interspersed with 50% losses in between. Or maybe we have 3 real Buffetts among us.)  8)

Extraordinary claims require extraordinary proof.  Non?

I had 2 years 2013 (GMCR) & 2014 (EW not sure if this one counts since I made a bundle that year on Calls but didn't actually sell any of the equity until last year & this year)

Either way I attribute both to luck even though I did visit stores & talk to managers re: K-Cup & Keurig machine sales for GMCR & read up on heart disease & valve replacements & competition (mainly Medtronic) for nearly a month before moving on EW.

I agree with you that anyone claiming to be a wizard should either step forward or ask Parsad to remove their vote...
Title: Re: Buffett's 50% per year on small sums
Post by: Patmo on October 28, 2016, 04:55:24 AM


If you're looking at small companies. Then they're probably not very good companies. Because the fact is that compounders compound so good companies tend to get big.


I think this is wrong but taken as religion.  No, there are wonderful small companies, but they're stuck in a niche making excellent non-scalable returns.  This is what most successful businesses find themselves in.  They hit a growth ceiling, but can make phenomenal returns in their little niche.  These are indeed excellent businesses.

Everyone wants a Starbucks or Cisco.  But I'd prefer to own some company making oil filters that has fantastic profit margins, little competition but is limited in how they can grow.

We have a board full of dreamers who are planning for that one day when they're running $5b or $10b.

And then you buy it for 3x earnings because the owners are going through a divorce
Title: Re: Buffett's 50% per year on small sums
Post by: vinod1 on October 28, 2016, 05:11:11 AM
If Bill Gates or Steve Jobs or Jeff Bezos said that if they are starting now from scratch they can build a company to transform an industry or grow it to a multi-billion dollar size, most of us would concur in agreement. But we would not think we can do it ourselves or even something we can shoot for.

Buffett makes the comment that he can get 50% returns if he is starting small and we seem to think that is within realm of possibility for, if not for many, at least for some of us. Buffett himself made a comment along these lines in the past.

I think he is an off the chart genius in investing just as Bill Gates and Steve Jobs are in business. So I think having something like 50% return target might be setting up for disappointment.

If you consider the fact that the expected returns on broad equity market is like 4-6% and bond market is 2%, someone making even 10% for next 20 years is going to stand out.

Vinod

Title: Re: Buffett's 50% per year on small sums
Post by: Patmo on October 28, 2016, 05:17:43 AM
I wouldnt be surprised if 50% was a floor year for warren buffet with small money. I'm probably on the opposite side of the spectrum from most fanboys who quote any WEB saying as if it were fact, but the guy is no joke. I'd expect AT LEAST 200 people in NA can pull off sustained 50% returns on small money and no institutional constraints, WEB would be in the higher tier of that group.

Making lots of money on small amounts is deceivingly easy if you have a mindset tailored for it. At that level, talent is still optional (of course, that helps tons though)
Title: Re: Buffett's 50% per year on small sums
Post by: Uccmal on October 28, 2016, 05:26:19 AM
The lack of someone actually doing it seems to suggest it is not possible.  Buffett is not the only investment genius and the entire field is vastly more competitive than 60 years ago (when Buffett incidentally wasn't doing 50%.) Between all these board members we would know someone who was doing this and we dont.   Occams Razor. 

Poll says that we have 3 people with 10 years+ of 50% annualized returns...  :o
Just sayin'

(OK, people could be trolling. And for 10 years answer I did not specify how the return should be calculated, and it's possible that the people voting have 50% annual returns interspersed with 50% losses in between. Or maybe we have 3 real Buffetts among us.)  8)

Jurgis, as you acknowledge the poll has not been worded right.  Come to think of it, How is the statement by Buffett worded?  Is he claiming he could do 50% once, 50% for 3 years, etc.? 
In its various forms I have seen, Buffett has claimed that if he was running 1-10 million he could get 50% returns...  it is never mentiomed how long. 

Getting 50% returns over 10 years (non-consecutive) historically, can be written off as a statistical fluke far too easily.  Buffett is claiming forward knowledge that he can do it. 
Title: Re: Buffett's 50% per year on small sums
Post by: writser on October 28, 2016, 05:46:10 AM
If Bill Gates or Steve Jobs or Jeff Bezos said that if they are starting now from scratch they can build a company to transform an industry or grow it to a multi-billion dollar size, most of us would concur in agreement. But we would not think we can do it ourselves or even something we can shoot for.

I disagree. Bill, Steve and Jeff are obviously very smart and driven but watch out for survivorship bias. These guys were also extremely lucky to be at the right time and place with the right people (Woz!) and circumstances. Without their current wealth, network and reputation I'd say the odds are heavily stacked against them (_anyone_) transforming an industry.

Also, I believe the key to sustainable 50% returns (if possible, consider me skeptical) is to obsessively watch the market and research individual stocks and companies 24/7. Participating in this thread would certainly be detrimental. Might explain why only the sub-50% losers are responding. Too lazy to do the actual work :) .
Title: Re: Buffett's 50% per year on small sums
Post by: Uccmal on October 28, 2016, 06:23:40 AM
If Bill Gates or Steve Jobs or Jeff Bezos said that if they are starting now from scratch they can build a company to transform an industry or grow it to a multi-billion dollar size, most of us would concur in agreement. But we would not think we can do it ourselves or even something we can shoot for.

I disagree. Bill, Steve and Jeff are obviously very smart and driven but watch out for survivorship bias. These guys were also extremely lucky to be at the right time and place with the right people (Woz!) and circumstances. Without their current wealth, network and reputation I'd say the odds are heavily stacked against _anyone_ transforming an industry.

Also, I believe the key to sustainable 50% returns (if possible, consider me skeptical) is to obsessively watch the market and research individual stocks and companies 24/7. Participating in this thread would certainly be detrimental. Might explain why only the sub-50% losers are responding. Too lazy to do the actual work :) .

Agree with your first paragraph.  Talent no doubt helps but luck (right place/right time/ right industry) plays a role.  An apt comparison is professional musicians or actors.  Neil Young has acknowledged the effect of luck in his career, as ornery as he is. 

Agree with paragraph two as well to a point.  Its hard work to become the best at any field.  The double edged problem with investing is that you need to know what to avoid.  A better question for Buffett might be: What would you avoid to get your 50% returns?  He has had some big recent failures in 'old' industry companies.  How would he avoid the inherent speculation in the tech service industry and still get the returns he claims he could get? 
Title: Re: Buffett's 50% per year on small sums
Post by: oddballstocks on October 28, 2016, 06:34:39 AM


If you're looking at small companies. Then they're probably not very good companies. Because the fact is that compounders compound so good companies tend to get big.


I think this is wrong but taken as religion.  No, there are wonderful small companies, but they're stuck in a niche making excellent non-scalable returns.  This is what most successful businesses find themselves in.  They hit a growth ceiling, but can make phenomenal returns in their little niche.  These are indeed excellent businesses.

Everyone wants a Starbucks or Cisco.  But I'd prefer to own some company making oil filters that has fantastic profit margins, little competition but is limited in how they can grow.

We have a board full of dreamers who are planning for that one day when they're running $5b or $10b.

And then you buy it for 3x earnings because the owners are going through a divorce

Bingo.  That's the key, opportunities come from external events.  A divorce, death of a parent etc.

These deals for companies at a few times earnings with high returns on capital are very common in the private company world.  In terms of returning cash to shareholders.  I own one niche company doing 30% ROI yearly, they dividend almost 100% of their earnings back to shareholders.

There was a video of Buffett talking in India.  A small cap value guy asked him what he'd be doing if he was managing less than $10m.  It's one of the best answers I've seen.  Buffett breaks from his script for a few minutes and mentions low book value stocks, net-nets, how he went through the Korean stocks.  Then almost as if he realizes what he's done he starts talking about how if you have a lot of money it isn't sustainable and he wants these great companies.

Buffett is opportunistic.  From what I've gathered he still does these crazy sorts of deals in his private account when possible.

I posted a series of links 2-3 years ago about a situation Buffett was involved in back in the early 2000s.  The company was a net-net and suddenly Buffett's name came on the register as a significant shareholder.  He made some boilerplate comment.  Then as quick as it was there it was gone, the stock had jumped 50%.  Then it fell again and he bought back in.  The guy was flipping nickles on a deep value play, nothing more, nothing less.  The paper asked if he was going to buy it for his empire, nope, just a cheap stock.

The issue with small stocks is they aren't scalable.  I spent a lot of time considering and researching the feasibility of a small value fund with the types of stocks I like.  My conclusion was that it's feasible below $5m in AUM, and potentially workable at $5m-$10m.  But $10m is the ceiling.  I spoke to a friend who runs a fund and looks at similar stocks and his comment was that at $8m and higher it becomes impossible to buy in size enough to move the needle.  So maybe that's the ceiling?

The only way to bust through that ceiling is to change strategies.  You can't do simple deep value situations anymore.  Now you need more liquid value plays (distressed situations) and stocks that have some hair attached.  Or the compounders and GARP stuff that's popular.  And suddenly when you make a shift like that the investor now has to be skilled in multiple investment styles, it's different altogether.

Anyone who tries to build a fund in these areas either remains small and lives on rice and beans forever.  Or they grow and shift their strategy.  This is truly the domain of the individual.
Title: Re: Buffett's 50% per year on small sums
Post by: Jurgis on October 28, 2016, 06:35:54 AM
I was contacted privately by one person who says that they have had compounded annualized return over 50% for 5+ years. (So their claim is a bit different from selections in poll, but pretty much what we would consider "performance" of an investor). The person chose to remain anonymous.
Title: Re: Buffett's 50% per year on small sums
Post by: Cardboard on October 28, 2016, 07:01:57 AM
"The double edged problem with investing is that you need to know what to avoid."

Buffett has mentioned in one of his annual letters that the key is to say no and I agree. See point #3 below.

I have done 50%+, 4 times in 20 years and 2 that were in consecutive years. However, the overall return over that period is now just over 20% since I blew up with the oil crash. I had become complacent to tell the truth. Wasn't working hard enough anymore and enjoying the good life. I can also attest that once the amounts grow larger, that it becomes really hard to deploy capital.

Doing 50% a year on sub $1 million has to be feasible and I did think a lot on how to do it following Buffett's comment. With over 350 million people in NA (while I don't know how many are at the investing game), the normal curve should indicate some capable to do it. Definitely outliers but, still.

In terms of strategy, I think that the following are some of the things needed and in order of difficulty:

1) You need to find bargains all the time. And if you want 50%, you have to aim for minimum doubles in one year's timeframe in order to reduce bad probabilities which will inevitably occur. This is the easy part IMO and does not require that much effort since there are so many sites and places for ideas.

2) You need to be heartless. You can't fall in love with your companies. They always have to be re-valued vs your other holdings and new ideas in terms of capital deployment. 

3) You need to sort out bargains and buy only the ones that are near perfect: cheap, positive catalyst or trend in place and good supply/demand for the shares (if you buy something and a major holder is in the process of liquidating, you have to wait or counter balance his selling).

The last point is very tough since it requires a very high degree of discipline, an uncanny ability to recognize a shift and access to information that is not public or difficult to get.

Cardboard
Title: Re: Buffett's 50% per year on small sums
Post by: NeverLoseMoney on October 28, 2016, 07:14:56 AM
From the 2005 Kansas U visit to Berkshire,

Quote
According to a business week report published in 1999, you were quoted as saying “it's a huge structural advantage not to have a lot of money. I think I could make you 50% a year on $1 million. No, I know I could. I guarantee that.” First, would you say the same thing today? Second, since that statement infers that you would invest in smaller companies, other than investing in small-caps, what else would you do differently?

Yes, I would still say the same thing today. In fact, we are still earning those types of returns on some of our smaller investments. The best decade was the 1950s; I was earning 50% plus returns with small amounts of capital. I could do the same thing today with smaller amounts. It would perhaps even be easier to make that much money in today's environment because information is easier to access.

You have to turn over a lot of rocks to find those little anomalies. You have to find the companies that are off the map - way off the map. You may find local companies that have nothing wrong with them at all. A company that I found, Western Insurance Securities, was trading for $3/share when it was earning $20/share!! I tried to buy up as much of it as possible. No one will tell you about these businesses. You have to find them.

Other examples: Genesee Valley Gas, public utility trading at a P/E of 2, GEICO, Union Street Railway of New Bedford selling at $30 when $100/share is sitting in cash, high yield position in 2002. No one will tell you about these ideas, you have to find them.
There probably are people capable of making 50% on small sums in public markets.

I think a few things are essential to be able to get anywhere close to achieving that:
- extreme concentration
- distressed or forced sellers on the other side of the transaction
- a hard catalyst that is virtually guaranteed to cause the mispriced security to reprice in short order

In the quote above Buffett talked about investing in obscure stuff trading at extremely low P/E's. I love searching for stocks like this myself, but I don't think you can get anywhere near achieving 50% returns consistently by doing that, even if you're only running a million dollar portfolio. If you find a few companies at those multiples, you should do very well, but they got so cheap because they are very obscure and usually illiquid. That situation is unlikely to change in the near future for any particular stock. So your bargains would often remain very cheap for at least a few years. That should destroy any chance of getting these types of returns. I think your buys will have to reprice very quickly to get anywhere near 50%.

And I agree with writser that people capable of doing it would not be posting in this thread. That would be the dumbest thing to do, wouldn't it? If you are capable of achieving 50% returns consistently you don't need other people's money to get extremely rich, so you wouldn't want to be running a fund. That would only hurt you, because you would be sharing extremely valuable ideas with outside investors. Extra money from outsiders would only lead to your strategy failing earlier. You certainly wouldn't need more competition for those very scarce ideas, so you wouldn't be sharing them on a message board or a blog just to get credit from people on the internet. You would just make your money and shut up.
Title: Re: Buffett's 50% per year on small sums
Post by: no_free_lunch on October 28, 2016, 07:28:55 AM
With regards to the poll, there are people on the board who include capital saved in their return.  So if you start with $10k, add $10k per year plus a bit of gains maybe you are now at $100k 5 years later.   That is like 60% per year or something but completely different from what we  are talking about.  Frankly, I think a lot of people just do things like this to fudge their numbers, intentionally or unintentionally.

I am going to back to what I said earlier.  If this is possible find me some small mutual fund with the performance record to back it up.  Forget 50%, can we even find a consistent 20% return?
Title: Re: Buffett's 50% per year on small sums
Post by: Jurgis on October 28, 2016, 07:43:14 AM
I am going to back to what I said earlier.  If this is possible find me some small mutual fund with the performance record to back it up.  Forget 50%, can we even find a consistent 20% return?

You can't find such mutual fund for couple of reasons:
1. Nobody runs 10M mutual fund. 50% becomes way harder to achieve if you look at 100M+ funds.
2. Even if they ran 10M fund, by the time you get performance record, it would be 1B+ fund. Good performers soak up capital like sponges.
3. Mutual fund issues with cash outflows during crashes (2008-2009-2010) kills performance. Also holding cash to satisfy outflows kills performance. Also getting cash inflows you can't deploy kills performance.

You might find a fund that runs 20% for 5+ years. Unlikely for 10+ years. I've had another thread on trying to find mutual funds that outperform SP500, but Morningstar free screener is broken  :'( and I could not get far with this project. Still looking for pointers for a free fund screener that works.
Title: Re: Buffett's 50% per year on small sums
Post by: Gregmal on October 28, 2016, 08:16:29 AM
And I agree with writser that people capable of doing it would not be posting in this thread. That would be the dumbest thing to do, wouldn't it? If you are capable of achieving 50% returns consistently you don't need other people's money to get extremely rich, so you wouldn't want to be running a fund. That would only hurt you, because you would be sharing extremely valuable ideas with outside investors. Extra money from outsiders would only lead to your strategy failing earlier. You certainly wouldn't need more competition for those very scarce ideas, so you wouldn't be sharing them on a message board or a blog just to get credit from people on the internet. You would just make your money and shut up.

Pretty much this, although with some exceptions. For the most part, 2/20 works on scale. Bigger you are the better. However with smaller amounts of money, at a normal fund fee structure, its just not worth the time taking other peoples money if you can indeed make yourself 50% per year. You have 5,000,000 of outside money and do 50%, thats $100,000 upfront and $500,000 in performance fees. Whereas if you have only 1,000,000 of your own money you can make more or less the same but without the headache of dealing with all the crap that comes with managing money for other people.
Title: Re: Buffett's 50% per year on small sums
Post by: Uccmal on October 28, 2016, 08:19:18 AM
"The double edged problem with investing is that you need to know what to avoid."

Buffett has mentioned in one of his annual letters that the key is to say no and I agree. See point #3 below.

I have done 50%+, 4 times in 20 years and 2 that were in consecutive years. However, the overall return over that period is now just over 20% since I blew up with the oil crash. I had become complacent to tell the truth. Wasn't working hard enough anymore and enjoying the good life. I can also attest that once the amounts grow larger, that it becomes really hard to deploy capital.

Doing 50% a year on sub $1 million has to be feasible and I did think a lot on how to do it following Buffett's comment. With over 350 million people in NA (while I don't know how many are at the investing game), the normal curve should indicate some capable to do it. Definitely outliers but, still.

In terms of strategy, I think that the following are some of the things needed and in order of difficulty:

1) You need to find bargains all the time. And if you want 50%, you have to aim for minimum doubles in one year's timeframe in order to reduce bad probabilities which will inevitably occur. This is the easy part IMO and does not require that much effort since there are so many sites and places for ideas.

2) You need to be heartless. You can't fall in love with your companies. They always have to be re-valued vs your other holdings and new ideas in terms of capital deployment. 

3) You need to sort out bargains and buy only the ones that are near perfect: cheap, positive catalyst or trend in place and good supply/demand for the shares (if you buy something and a major holder is in the process of liquidating, you have to wait or counter balance his selling).

The last point is very tough since it requires a very high degree of discipline, an uncanny ability to recognize a shift and access to information that is not public or difficult to get.

Cardboard

I have had 2 years in the last 12 with >50% returns.  Its partly luck.  The biggest winner was the FFH options.  On the other hand I have had a couple of dismal years (one with -30%). When I toss out the best year and the worst year to clean up the stats my CAGR is over 20%.  That is from the time I stopped adding outside capital.  I definitely do not expect this going forward since I have become more cautious leaning towards GARP, and much lazier.  I suppose I could be out overturning rocks every day but I feel more comfortable operating as I am and waiting for the inevitable market correction when I will activate. 

Another question for Buffett.  He doesn't have to rely on investing for his income.  Could he do his 50%, keep up with the mortgage on a 700,000 house, educate three kids, etc., today, with no other source of cash.  One bad year, early on, and he would be fried.  There are so many extraneous factors in his claim.  In fact, had he hit a couple of bad years early on, would we even know who he is right now.  The message board could be called the Corner of Liberty Media and Apple. 
Title: Re: Buffett's 50% per year on small sums
Post by: scorpioncapital on October 28, 2016, 08:24:21 AM
This Buffet claim is the closest I've seen him come to boasting. Clearly he can't imagine 50% per year is a trivial amount. Of course, one doesn't say the starting amount or for how many years. If I borrow my neighbour's lawnmower and mow some lawn my return is infinite. He chipped in a small amount to the capital of the partnerships so his returns are personally above 50% but due to leverage. Leverage can produce these returns if done right.


Title: Re: Buffett's 50% per year on small sums
Post by: NeverLoseMoney on October 28, 2016, 09:10:19 AM
Quoting the post from oddballstocks to provide a few links for those interested.


There was a video of Buffett talking in India.  A small cap value guy asked him what he'd be doing if he was managing less than $10m.  It's one of the best answers I've seen.  Buffett breaks from his script for a few minutes and mentions low book value stocks, net-nets, how he went through the Korean stocks.  Then almost as if he realizes what he's done he starts talking about how if you have a lot of money it isn't sustainable and he wants these great companies.
The video: https://www.youtube.com/watch?v=BPTz-jLkPOc&feature=youtu.be&t=9m52s

Quote
Buffett is opportunistic.  From what I've gathered he still does these crazy sorts of deals in his private account when possible.

I posted a series of links 2-3 years ago about a situation Buffett was involved in back in the early 2000s.  The company was a net-net and suddenly Buffett's name came on the register as a significant shareholder.  He made some boilerplate comment.  Then as quick as it was there it was gone, the stock had jumped 50%.  Then it fell again and he bought back in.  The guy was flipping nickles on a deep value play, nothing more, nothing less.  The paper asked if he was going to buy it for his empire, nope, just a cheap stock.
That was Bell Industries in 1999-2000:

- http://articles.latimes.com/1999/dec/14/business/fi-43809
- http://articles.latimes.com/2000/jan/18/business/fi-55214
- http://articles.latimes.com/2000/nov/09/business/fi-49227
Title: Re: Buffett's 50% per year on small sums
Post by: BG2008 on October 28, 2016, 09:49:55 AM
Surprised that no one has mentioned ericopoly so far.  There was a whole thread on his 10+ year of 70% performance. 

Title: Re: Buffett's 50% per year on small sums
Post by: wabuffo on October 28, 2016, 09:54:20 AM
In my opinion - there's no way Buffett can achieve 50% cumulative returns without the use of borrowed money. 

His actual portfolios always involved borrowed money of some sort.  Always.   I think his genius is that he is able to avoid losses ("rule no 2, never forget rule no. 1"...) because leverage will magnify gains but will also magnify losses.

wabuffo
Title: Re: Buffett's 50% per year on small sums
Post by: augustabound on October 28, 2016, 10:07:00 AM
Surprised that no one has mentioned ericopoly so far.  There was a whole thread on his 10+ year of 70% performance.

Ericopoly is the first person I thought about actually.
Title: Re: Buffett's 50% per year on small sums
Post by: rb on October 28, 2016, 10:11:06 AM
Surprised that no one has mentioned ericopoly so far.  There was a whole thread on his 10+ year of 70% performance.

Ericopoly is the first person I thought about actually.
Ericopoly made it with options so I think that brings us back to the idea that you need some significant leverage to do this.
Title: Re: Buffett's 50% per year on small sums
Post by: wabuffo on October 28, 2016, 10:23:20 AM
Quote
In my opinion - there's no way Buffett can achieve 50% cumulative returns without the use of borrowed money.

His actual portfolios always involved borrowed money of some sort.  Always.   I think his genius is that he is able to avoid losses ("rule no 2, never forget rule no. 1"...) because leverage will magnify gains but will also magnify losses.

I forgot to add that one of the reasons one can't make 50% returns with a long-only (no margin, no options) account, is the inevitable market swoons will make it hard for the portfolio to also not suffer a mark-to-market loss.  So in addition to leverage, Buffett also used long-short strategies and market-neutral positions to make sure he beat the Dow during down markets.  He was doing this almost from Day 1 of his Graham-Newman days.

I don't think its possible to do 50% returns for, say, 5 years straight with a long-only portfolio (and no margin, options, etc)... even for Buffett.

Something tells me that Buffett probably regrets that 1999 Business Week quote about 50% returns, but what do I know.

wabuffo
Title: Re: Buffett's 50% per year on small sums
Post by: JayGatsby on October 28, 2016, 10:30:06 AM
Surprised that no one has mentioned ericopoly so far.  There was a whole thread on his 10+ year of 70% performance.

Ericopoly is the first person I thought about actually.
Ericopoly made it with options so I think that brings us back to the idea that you need some significant leverage to do this.
I think Soros and the team at Quantum (Rogers, Druckenmiller) were in that bucket as well. Rogers said they used a lot of leverage and got a lot of bets right.
Title: Re: Buffett's 50% per year on small sums
Post by: Jurgis on October 28, 2016, 10:45:11 AM
I forgot to add that one of the reasons one can't make 50% returns with a long-only (no margin, no options) account, is the inevitable market swoons will make it hard for the portfolio to also not suffer a mark-to-market loss.

So I am in the camp that it is very hard to impossible to make 50% annualized returns for long term consistently. (Although by now we have 6 people in the poll who marked to have done so).

However, IMO people think about this in wrong way - and my poll did not help: you don't have 50% returns on years of market swoons. But you have 300-400% return couple years after market swoon which returns you to over 50% returns annualized.

Same with undervalued nanocaps. Sure, they might not move for a year. But if/when they move, they can move 100-300% making up for waiting time.

And, yeah, it is possible to have 100%+ yearly return without leverage or options.

(No, I'm not one of the 6 Buffetts in the poll).
Title: Re: Buffett's 50% per year on small sums
Post by: KCLarkin on October 28, 2016, 10:48:11 AM
Something tells me that Buffett probably regrets that 1999 Business Week quote about 50% returns, but what do I know.

Normally, I'd agree. But he has repeated it many times since. Or at least not taken the opportunity to walk it back.
Title: Re: Buffett's 50% per year on small sums
Post by: rb on October 28, 2016, 10:58:42 AM
Something tells me that Buffett probably regrets that 1999 Business Week quote about 50% returns, but what do I know.

Normally, I'd agree. But he has repeated it many times since. Or at least not taken the opportunity to walk it back.
Yes I remember him talking about making 50% on small sums around 2011 or 2012. Not sure if he said per year or that there are stocks at 50% discount to IV.
Title: Re: Buffett's 50% per year on small sums
Post by: wabuffo on October 28, 2016, 11:10:25 AM
Quote
(No, I'm not one of the 6 Buffetts in the poll).

he he - I'm not either (actually I didn't even answer the poll)  8)

I always go back to Buffett's quote about making 50% returns in the early 1950's (before even the BPL days). IIRC, he said something like "you should check my record ... I killed the Dow".  He reportedly started with $7800 at the beginning of 1950 and finished with $174,000 in 1956. (various sources, Snowball, Kilpatrick's books, etc).  That's a 55% CAGR if my math is right and assuming no capital additions by him during that period.

We can get a small insight into his portfolios of that period.  Its Buffett's year-end portfolios from 1950 and 1951 (he made a 75.8% return in '51).  The source is from one of Andy Kilpatrick's books.  His 1950 portfolio did not included margin but was only at $9800 but his 1951 portfolio includes margin of $5000 ("bank loans") on a long portfolio of $24,800.  Since we know that Buffett continued to use borrowed money in his Buffett Partnership days he probably used increasing amounts of leverage in this period (1950-1956) as his capital base grew.

I'm not saying that it's not theoretically possible to get 50%, 100% returns from a single stock that you hold throughout some ups and downs (particularly if the business retains its earnings and grows quickly) -- but I don't think anyone can generate 50% returns from even a concentrated portfolio of 2-5 stocks, long-only, held over 5 years.  Not without margin or options (and a lot of luck).

Even Buffett's own example (1950-56) was one that was helped by margin.  This does not diminish the accomplishment by Buffett or my respect for his record (we're still talking probably 30% unlevered returns).  I just worry that he unintentionally misleads when he talks about the levered record but omits mentioning the use of leverage in helping to achieve it.

wabuffo
Title: Re: Buffett's 50% per year on small sums
Post by: alwaysinvert on October 28, 2016, 01:07:55 PM
The idea of a long-term 50% CAGR is ridiculous. Someone asked for a fund posting those numbers. What do you think would be happen to such a fund? Do you actually realize how fast that compounds thus hampering returns? Not to mention how fast hot money would chase down the returns by providing size.

But OK, I grant the possibility that a Buffett like genius could compound at 50% for 10 years plus if he had an extremely high withdrawal rate and didn't take OPM. Why that would ever be the case.
Title: Re: Buffett's 50% per year on small sums
Post by: thepupil on October 28, 2016, 01:55:23 PM
Are there other examples of 50% gross for 10 years in public stocks?

https://www.finect.com/file/download/blog/0020e47b2da014b31069eb60e47b2da014b31069eb6

Joel Greenblatt is the managing principal
and co-chief investment officer of Gotham
Asset Management, the successor to Gotham
Capital, an investment firm he founded
in 1985. He has a long history of being a
successful value-driven investor. At Gotham
Capital Greenblatt built one of the best
10-year track records around: compounding his
capital at 50% per year from 1985-1994 (net return
for this period was 34.4%)
. At the end of that period
Greenblatt returned all of his partners’ capital.

Title: Re: Buffett's 50% per year on small sums
Post by: Gregmal on October 28, 2016, 05:21:12 PM
I would also think parameters should be established. With leverage or if you are able to borrow it would actually be quite easy. I don't think its a stretch to say that generating a positive return is difficult at all. One should be able to be net positive over any 3 year period regardless of market conditions. Sure a curveball comes ones way like in 08, yea, you'll be down, but a running 3 year period gives enough time to adjust. So if you can generate a positive return, how difficult would it be to take 10k of your own capital along with a 100k home equity loan at a 4% rate. With margin buying power at 2%, you have essentially 220k to work with in order to pay 4-6k in interest and make an additional 5k for your 50% return. Using the 220k figure you'd need to net ~5%. Your returns would need to increase but lets say you do 15% the first year, then you're already at 34k off a 10k starting point.
Title: Re: Buffett's 50% per year on small sums
Post by: Jurgis on October 29, 2016, 08:27:31 AM
Another person who wished to remain anonymous send me this via private message:

Quote
I'm one of the people who have earned 50%+ for 10 years or more. I'm right at the 10 year mark. I don't invest in stocks, but real estate. This probably doesn't count or isn't exactly what you're looking for, but I have made money from it.
Title: Re: Buffett's 50% per year on small sums
Post by: wabuffo on October 29, 2016, 09:16:07 AM
Quote
I don't invest in stocks, but real estate.

I would presume a fair amount of borrowed money is employed in the generation of those returns?

I found this study interesting...
http://blog.alphaarchitect.com/2016/02/02/even-god-would-get-fired-as-an-active-investor/ (http://blog.alphaarchitect.com/2016/02/02/even-god-would-get-fired-as-an-active-investor/)

Basically - it assumes with perfect foresight, one could pick the top decile stocks performers for the next five years starting in 1927 and continuing until end of 2009.  At the end of each five year period, portfolio would rebalance to the best performing stocks for the next five years and so on...  In other words, its as if you get the stock pages exactly five years from now and buy the top decile stocks based on price performance.  Dividends are included and an assumption is made for transaction costs.

Even in "god-mode", the returns for the top decile long-only portfolio are 28.9% vs S&P at 9.6%.  The other thing to note is you are still not insulated from some nerve-wracking declines (which might shake out weaker hands).

(http://i66.tinypic.com/r9n2qa.jpg)

The author also attempts a long-short portfolio with the same methodoloy (ie, short a basket of the worst-performing stocks) that attains close to 50% but also experiences some bone-rattling swoons.

I think the key points are:
1) Achieving 20%+ CAGRs with a long-only portfolio is very, very hard over a long period of time (maybe even impossible)
2) To attain these strong results, you also have to have the emotional capability to sit through declines of 50% without bailing (and cementing a permanent loss of capital).

Again - portfolio concentration + using margin could be used to amp up returns, but those declines can be a killer.

I think Buffett did a disservice talking about guaranteeing 50% returns because it could lead people into thinking they can do it.  They will be disappointed, ultimately.

wabuffo
Title: Re: Buffett's 50% per year on small sums
Post by: KCLarkin on October 29, 2016, 10:02:26 AM
Wabuffo, that is a great study. But it is explicitly limited to the 500 largest US stocks. We know this is not where Buffett thinks he can get 50% returns. He is talking about nano-caps and emerging markets.

A decile portfolio is also 50 stocks. Way too diversified to get exceptional returns.
Title: Re: Buffett's 50% per year on small sums
Post by: wabuffo on October 29, 2016, 10:17:24 AM
Quote
A decile portfolio is also 50 stocks. Way too diversified to get exceptional returns
Well yes -- but I would think the offset that makes it worthwhile is you're like Marty McFly in Back to the Future getting the BEST 50 stocks from a USA Today newspaper printed five years from now!
(http://i64.tinypic.com/2nimbe8.jpg)

At the risk of becoming that boring dinner guest who won't stop talking....   ;D

I'd like to also contrast Buffett's stock picking during the 80s and 90s in the Berkshire Hathaway stock portfolio (before BRK transformed into more of a holding company of wholly-owned subs in the double-naughts) with this upper bound from my previous post.

I once tried to separate Buffett's raw returns as a stock picker from the leveraged returns from 1982-2000 (using insurance float as a zero-cost margin account).

The results:
S&P 500 - 16.8%  (1982-2000 was a great bull market after all!)
BRK Return on investments - 19.1% (Pre-tax return/avg. investments)
BRK Return with leverage - 26.6% (Pre-tax return less leverage costs/avg. equity)

Again - I'm not trying to disparage Buffett, but his results were just a bit better than the S&P (+2.3%) and there were probably a few top-tier mutual funds that did as well or better in terms of stock picking performance.  His genius is how he uses different sources of margin to amplify returns.  That's always been what makes him so good -- he thinks hard about how he engineers great results because he is very good at avoiding permanent losses and smart about how he finds and uses leverage.

wabuffo
Title: Re: Buffett's 50% per year on small sums
Post by: KCLarkin on October 29, 2016, 11:07:48 AM
Quote
The highest rates of return I’ve ever achieved were in the 1950s. I killed the Dow. You ought to see the numbers. But I was investing peanuts then. It’s a huge structural advantage not to have a lot of money. I think I could make you 50% a year on $1 million. No, I know I could. I guarantee that.

Buffett, guarantees this with $1M. Over $10M, it definitely doesn't work. Let's say he has 5 positions, so $200k - $2M per each position. Let's say the max he wants to own per company is 10%. So the sweet spot seems to be nano-caps with market caps of $2M to $20M.

I once tried to separate Buffett's raw returns as a stock picker from the leveraged returns from 1982-2000

In 1982, his portfolio value was almost $1B. Instead of investing in $2M nano-caps, he needed to invest in $1B+ companies to move the needle. Size was already a massive anchor. Today, he needs to invest in $100B+ companies.

Title: Re: Buffett's 50% per year on small sums
Post by: no_free_lunch on October 29, 2016, 11:13:53 AM
This is some interesting analysis wabuffo.  Thanks for posting.  In particular the comments on the engineered use of leverage.  I don't really have anything to add but it is interesting that he just focuses on those areas where he can gain an advantage (insurance leverage, etc) without having to out think everyone (stock picking).
Title: Re: Buffett's 50% per year on small sums
Post by: netnet on October 29, 2016, 11:19:42 AM
Frankly, I wasn't expecting this discussion to be as long and vigorous as it turned out. My thoughts are:

Title: Re: Buffett's 50% per year on small sums
Post by: tombgrt on October 29, 2016, 11:40:25 AM
Quote
I don't invest in stocks, but real estate.

I would presume a fair amount of borrowed money is employed in the generation of those returns?

I found this study interesting...
http://blog.alphaarchitect.com/2016/02/02/even-god-would-get-fired-as-an-active-investor/ (http://blog.alphaarchitect.com/2016/02/02/even-god-would-get-fired-as-an-active-investor/)


Interesting study, thanks.

But the stocks picked are the largest 500 and those are often assumed to be the most efficiently priced. It's unlikely any data is available for the first few decades but it would be fun to see how small caps would fair. I'm assuming they would easily beat the large caps.

Prices might also be more attractive both in the lows and highs somewhere during the 5-year period. As a normal investor you aren't bound to this holding period of 5 years and you are able to roll over investments more often. One of the strongest tools of mentally stable investors is their ability to use volatility to their advantage.

As someone else stated, 50 stocks are a lot. Randomly picked you would be labeled an index hugger. (On the other hand, I believe Peter Lynch had plenty of stocks in Magellan and still kicked ass.)


You could make a study with 10 small cap stocks over 6 months periods and you'd get a CAGR that is a multiple of 28.89%.Reversly, this wouldn't indicate that you could achieve absurd CAGR returns over very long time periods either. But these studies are interesting regardless.
Title: Re: Buffett's 50% per year on small sums
Post by: KCLarkin on October 29, 2016, 11:41:01 AM
IIRC, Buffett used leverage for low risk arb ops not for Generals. So leverage isn't required.

If we assume he that he would allow leverage, then we know it is possible because Greenblatt and others have done 50% with small sums plus leverage.
Title: Re: Buffett's 50% per year on small sums
Post by: no_free_lunch on October 29, 2016, 12:27:27 PM
I have been thinking about this and all I can think of is there are market anomalies that you could exploit with small sums.  They are so rare that I just disregard them but every now and then you see things where it is near risk-less profit.  For instance, I once saw the subsidiary of a company announce a major deal.  The subsidiary stock shot up immediately but for a an hour or 90 minutes as I recall the parent barely budget.  It was just sitting there because there just wasn't a major investor analyzing this who had the time to put in a buy order. There was just no reason for the stock not to have moved up and sure enough an hour or two later it did.

These things come up so rarely, I really only see them every year or so but if you had the time and work ethic you might be able to make some great returns looking for these anomalies. The thing is it would literally just be a full time job and you wouldn't be able to scale past a few hundred k.
Title: Re: Buffett's 50% per year on small sums
Post by: DooDiligence on October 30, 2016, 12:24:27 AM
Given the discussion here; I'm surprised at the lack of comments on the following:

http://www.cornerofberkshireandfairfax.ca/forum/books/warren-buffett's-ground-rules-jeremy-miller/msg262646/#msg262646

I found it to be an excellent read!
Title: Re: Buffett's 50% per year on small sums
Post by: netnet on October 30, 2016, 02:30:07 PM
Given the discussion here; I'm surprised at the lack of comments on the following:

http://www.cornerofberkshireandfairfax.ca/forum/books/warren-buffett's-ground-rules-jeremy-miller/msg262646/#msg262646

I found it to be an excellent read!

No comments because most have read his partnership letters already, (only slightly tongue in cheek  ;))
Title: Re: Buffett's 50% per year on small sums
Post by: DooDiligence on October 30, 2016, 09:16:26 PM
Given the discussion here; I'm surprised at the lack of comments on the following:

http://www.cornerofberkshireandfairfax.ca/forum/books/warren-buffett's-ground-rules-jeremy-miller/msg262646/#msg262646

I found it to be an excellent read!

No comments because most have read his partnership letters already, (only slightly tongue in cheek  ;))

I figured that was the case but as someone who's never understood the appeal of all the little highly levered, cruddy looking ideas posted here (I've been reading for nearly 3 years and just recently joined officially) this book has caused the scales to fall from my eyes.

I'd love to hear comments but in truth they're all over this forum (just not in this thread...)
Title: Re: Buffett's 50% per year on small sums
Post by: antao on October 31, 2016, 05:26:46 PM
I believe such returns are only attainable by either deep concentration (5 positions or less making at least 90% of the entire portfolio) and/or the use of moderate levels of leverage. For it to work security selection is of paramount importance and each new valid idea must come about only once a year or so on market conditions such as today's.
Title: Re: Buffett's 50% per year on small sums
Post by: DooDiligence on October 31, 2016, 11:25:13 PM
I believe such returns are only attainable by either deep concentration (5 positions or less making at least 90% of the entire portfolio) and/or the use of moderate levels of leverage. For it to work security selection is of paramount importance and each new valid idea must come about only once a year or so on market conditions such as today's.

Seems like you'd also need to get eyes on the assets to evaluate (has valuable property been depreciated, etc.?)

Fishers scuttlebutt:

Calling/visiting customers to see if product is sitting on loading bays or to hear if they offer generous credit on products they themselves got generous credit on.

Are vendors getting paid or are they selling receivables to factors?

What's the parking lot look like (does everyone take off intermittently for long lunches & are they driving hoopties?)

Probably a lot of work; fun work though! (the sound of cackling from an evil supervillain who turns out to be misunderstood & is really a good guy who likes the idea of saving & creating jobs...)
Title: Re: Buffett's 50% per year on small sums
Post by: HowMuchValue on November 02, 2016, 05:47:06 PM
I am finding it unbelievable that you guys on this value oriented board are doubting that Warren Buffett could rack up 50% returns on small sums of capital. You can get those returns too. No, you don't need leverage. No, I am not crazy  8).

How? Let's take some value investor mindset and combine it with math.

Assumptions:


From the above assumptions, if you buy X company when it is at 15x Owner Earnings, you will earn about a 10% rate of return per year.

What happens if you buy the company at 10 x Owner Earnings?

The value of this stock, on average after 3 years, would be (15 x Owner Earnings/10 x Owner Earnings) x (1 + 10%)^3 = 1.99x the value today (i.e. doubling in value after 3 years).

If your stock doubles in value after 3 years, this is a compounded annual return:

(10^(LOG(1.99)/3)-1) = 25.9% annual rate of return.

So, if you buy average companies when they are undervalued by about 33%, and sell them when they reach fair value, you will earn about a 26% rate of return over time.

If we required a 50% rate of return, then, we would need a stock to go up by this much every 3 years:

(10^(LOG(X)/3)-1)=50%

Solved for X: X = 3.38

We would need each stock, on average, to increase by 238% (3.38 minus the original value of 1) over 3 years.

How undervalued would this average stock need to be when we bought it to earn a 238% return over 3 years?

(15 x Owner Earnings/Y x Owner Earnings) x (1 + 10%)^3 = 3.38x the value today

Y = 5.9

Therefore if you bought average companies by the definition above at 5.9 x Owner Earnings and they are revalued to their fair value in times averaging 3 years, you will earn about a 50% rate of return.

Companies at 6 x Owner Earnings definitely exist. Generally you have to dig a little deeper than the income statement to understand depreciation versus maintenance capital expenditures (talk about a walloping difference for some real estate companies), cases where amortization is recorded as an expense but definitely isn't one, investments and/or expenses (even on the income statement) that will generate future growth, etc.

On top of that, businesses that are above average may deserve a higher multiple and will grow at higher rates than 10%.

So yes, it is definitely possible Buffett could beat 50%+ returns.
Title: Re: Buffett's 50% per year on small sums
Post by: thepupil on November 02, 2016, 05:58:25 PM
Are there other examples of 50% gross for 10 years in public stocks?

https://www.finect.com/file/download/blog/0020e47b2da014b31069eb60e47b2da014b31069eb6

Joel Greenblatt is the managing principal
and co-chief investment officer of Gotham
Asset Management, the successor to Gotham
Capital, an investment firm he founded
in 1985. He has a long history of being a
successful value-driven investor. At Gotham
Capital Greenblatt built one of the best
10-year track records around: compounding his
capital at 50% per year from 1985-1994 (net return
for this period was 34.4%)
. At the end of that period
Greenblatt returned all of his partners’ capital.

bump. any other examples of a moderately institutional, somewhat verifiable, 50% per year  for a decade? Sorry if i missed it.
Title: Re: Buffett's 50% per year on small sums
Post by: finetrader on November 02, 2016, 06:10:08 PM
Buffett said that if you look at stocks 52 week highs and lows, more often than not, the spread between the two is around 100%, from low to high.

So I think he is banking on capturing this spread when he is saying he could do 50% per year on small sums.
Title: Re: Buffett's 50% per year on small sums
Post by: DooDiligence on November 02, 2016, 08:51:32 PM
Buffett said that if you look at stocks 52 week highs and lows, more often than not, the spread between the two is around 100%, from low to high.

So I think he is banking on capturing this spread when he is saying he could do 50% per year on small sums.

He's a closet market timer...
Title: Re: Buffett's 50% per year on small sums
Post by: peter1234 on November 03, 2016, 02:50:49 AM
Here is a good chart from Frederik Vanhaverbeke's book Excess Returns: A comparative study of the methods of the world's greatest investors.

Spoiler alert: return scale "only" goes to 30% per year...(I believe it is returns over S&P 500, so maybe add another 10% to get absolute returns).

 :)



Title: Re: Buffett's 50% per year on small sums
Post by: hillfronter83 on November 03, 2016, 05:47:20 AM
Are there other examples of 50% gross for 10 years in public stocks?

https://www.finect.com/file/download/blog/0020e47b2da014b31069eb60e47b2da014b31069eb6

Joel Greenblatt is the managing principal
and co-chief investment officer of Gotham
Asset Management, the successor to Gotham
Capital, an investment firm he founded
in 1985. He has a long history of being a
successful value-driven investor. At Gotham
Capital Greenblatt built one of the best
10-year track records around: compounding his
capital at 50% per year from 1985-1994 (net return
for this period was 34.4%)
. At the end of that period
Greenblatt returned all of his partners’ capital.

bump. any other examples of a moderately institutional, somewhat verifiable, 50% per year  for a decade? Sorry if i missed it.

"[Renaissance] won the [Labor Department]'s permission to put pieces of Medallion inside Roth IRAs. That means no taxes -- ever -- on the future earnings of a fund that averaged a 71.8 percent annual return, before fees, from 1994 through mid-2014."
https://en.wikipedia.org/wiki/Renaissance_Technologies
Title: Re: Buffett's 50% per year on small sums
Post by: petec on November 03, 2016, 06:04:50 AM
That's a great chart!
Title: Re: Buffett's 50% per year on small sums
Post by: antao on November 04, 2016, 05:59:52 AM
I am finding it unbelievable that you guys on this value oriented board are doubting that Warren Buffett could rack up 50% returns on small sums of capital. You can get those returns too. No, you don't need leverage. No, I am not crazy  8).

How? Let's take some value investor mindset and combine it with math.

Assumptions:

  • Use Owner Earnings for all calculations as defined by Warren Buffett (we all know reported "Net Income" is sometimes ridiculously off base)
  • An average company earns a 10% return on invested capital (Owner Earnings/Invested Capital) and can re-invest capital at 10% rates of return
  • An average company is worth 15x Owner Earnings (simplistic, but you can and should adjust for debt. You should not subtract 100% of debt necessarily - low yielding debt is actually value creating if the company is used to generate returns higher than its cost. Also increased borrowing base is something that increases as a company earns more money which can cause a virtuous circle)
  • It takes 3 years, on average, for a company to reach its fair value
  • Some companies will take less than 3 years and some will take more. The ones that become fairly valued sooner you sell and invest in companies that are more undervalued.

From the above assumptions, if you buy X company when it is at 15x Owner Earnings, you will earn about a 10% rate of return per year.

What happens if you buy the company at 10 x Owner Earnings?

The value of this stock, on average after 3 years, would be (15 x Owner Earnings/10 x Owner Earnings) x (1 + 10%)^3 = 1.99x the value today (i.e. doubling in value after 3 years).

If your stock doubles in value after 3 years, this is a compounded annual return:

(10^(LOG(1.99)/3)-1) = 25.9% annual rate of return.

So, if you buy average companies when they are undervalued by about 33%, and sell them when they reach fair value, you will earn about a 26% rate of return over time.

If we required a 50% rate of return, then, we would need a stock to go up by this much every 3 years:

(10^(LOG(X)/3)-1)=50%

Solved for X: X = 3.38

We would need each stock, on average, to increase by 238% (3.38 minus the original value of 1) over 3 years.

How undervalued would this average stock need to be when we bought it to earn a 238% return over 3 years?

(15 x Owner Earnings/Y x Owner Earnings) x (1 + 10%)^3 = 3.38x the value today

Y = 5.9

Therefore if you bought average companies by the definition above at 5.9 x Owner Earnings and they are revalued to their fair value in times averaging 3 years, you will earn about a 50% rate of return.

Companies at 6 x Owner Earnings definitely exist. Generally you have to dig a little deeper than the income statement to understand depreciation versus maintenance capital expenditures (talk about a walloping difference for some real estate companies), cases where amortization is recorded as an expense but definitely isn't one, investments and/or expenses (even on the income statement) that will generate future growth, etc.

On top of that, businesses that are above average may deserve a higher multiple and will grow at higher rates than 10%.

So yes, it is definitely possible Buffett could beat 50%+ returns.

HowMuchValue, Although your reasoning is theoretically accurate, in the real world this is not so straightforward. I will not even discuss the real-word difficulty to each and every time correctly assess owner earnings, return on invested capital, return on incremental invested capital, their respective future growth rates, unexpected developments in the company or in its industry, broad market corrections, and so much more. But even if this was possible and one could correctly know these factors in advance with 100% accuracy, market acknowledgment could be off by 1 year or 2 (to be generous), severely impairing your reasoning.

I believe the problem with compounding at a 50% rate is not so much the theoretical possibility - which exists up until a certain point, no one doubts it - but the practical challenges of doing so.

BTW, your post reminded me of an advice from Will Rogers about investing: "Buy some good stock and hold it till it goes up, then sell it. If it don't go up, don't buy it."
Title: Re: Buffett's 50% per year on small sums
Post by: HowMuchValue on November 05, 2016, 02:34:34 PM
Antao,

I did not say earning 50+% per year would be easy. The factors you described (and a multitude of others) are where investing skill, analysis, history, and hard work are required.

However:


If you are going to take my advice, look for stocks that are priced at 40% or less than your well thought out realistic and slightly conservative estimate of their intrinsic value if you are aiming to earn a 50% rate of return.
Title: Re: Buffett's 50% per year on small sums
Post by: sae85400 on November 07, 2016, 11:32:19 AM
Here is a good chart from Frederik Vanhaverbeke's book Excess Returns: A comparative study of the methods of the world's greatest investors.

Spoiler alert: return scale "only" goes to 30% per year...(I believe it is returns over S&P 500, so maybe add another 10% to get absolute returns).

 :)

That is a great chart...

Would have thought Druckenmiller would have had more years..But I bet they don't count the years (88-00) when he was running Quantum fund for Soros(so technically Soros number isn't his)
Title: Re: Buffett's 50% per year on small sums
Post by: bci23 on November 08, 2016, 12:04:01 PM
"If Charlie and I had $500,000 or $2 million to invest, we'd find little things we could do, not all of it in stocks"

I think the bolded part is the most important when it comes to compounding a small amount of money at 50%/yr+, investments outside of stocks. A couple ways i know of people earning high returns outside of stocks, one buys and sells web domains, another buys and resells clothing, and another is a professional gambler. The individual selling clothing has done over 100% pre-tax returns on invested capital each of the last 5 years. Invested capital is a mid to high 5 figure $ amount. A professional gambler should be able to earn 100% pre-tax returns on bankrolls up to $250k with some being able to do it with $500k-$1m.
Title: Re: Buffett's 50% per year on small sums
Post by: bizaro86 on November 08, 2016, 07:26:09 PM
I think one of the little things would probably be real estate, as mentioned above. There are, what 20,000 public companies in the US? By comparison, there were ~500k houses sold in the US last year, so there are way more opportunities for something to be mispriced. The other big factor is leverage. 5:1 leverage would be pretty standard in real estate, and given that you can get fixed rate, non-callable (and non-recourse where I live) leverage, that's a lot different than a margin loan. If you make the payments, you never get called, even if your collateral drops materially in value. Plus, non-recourse makes it close to a put (with credit consequences, but still).

The biggest factor that would allow someone to make 50% plus would be turning over properties quickly. I've sold 6 properties for gains, and the IRRs varied directly with how long I owned them. I have them below in descending order:

1) <1 year 199%
2) <1 year 180%
3) ~1 year 136%
4) ~1 year 120%
5) 3.5 years 27%
6) 5 years 9%

A couple of notes. I didn't take credit for the less than a year holding time, so the 180% was a 1.8X multiple of my investment. I didn't take credit for positive cash flow, which was present but wouldn't meaningfully change the results. The real estate market was moving up ~1-2% per year during this time frame. These assume 20% downpayments. In actuality, I borrowed the downpayments on a heloc, which makes the IRRs infinite. The sums are very small.

The last qualification is by far the most relevant. The largest gain was a condo unit I purchased for a net cost (inc. purchase, renovations, and legals) for $75k. Of that 18.6k was downpayment/renos. I sold it for $112k within a year.

The lowest one had a bit of bad luck (a tenant did tens of thousands of water damage, and the complex changed their deductible without telling me, leaving me on the hook for overages on my insurance) but the IRR was mostly reduced by the longer holding period. It was just as good a buy, and would have been a >100% IRR if I had sold it within 1 year.

Basically, longer holding times cause the ROE to revert closer to the cap rate of the property, which have universally been single digits. The huge returns have been from the free equity on a bargain purchase/smart renovation.

It's probably fair for me to make a couple of other comments. There's probably some labour value unaccounted for here from me project managing renos, and doing some of the carpentry work myself. I hire licensed trades for plumbing/electrical, and have a guy I use for tile/etc. These are a subset of my real estate portfolio. I bought 11 properties from 2009-2013, and sold 6. I sold the ones that were the lowest quality on a "headache reducing" basis. Some of the properties I've kept would have produced higher returns if sold right away, but I didn't have good reinvestment options so I kept them.

50% a year requires buying cheap stuff and turning it over quickly. That's true with stocks and real estate, imo. Compounders aren't going to get you 50%, imo, it will require higher turnover.
Title: Re: Buffett's 50% per year on small sums
Post by: netnet on November 21, 2016, 03:41:08 PM
So here is a question, Walter Schloss, another acolyte of Graham, has been routinely described as somewhat of a dim bulb, at least as compared to Munger and Buffett.  So, gentlemen and woman of the jury, is it possible for the, ahem, less well intellectually endowed to make that 50%??  Assuming the right temperament, humility and clear definition of circle of competence.
Title: Re: Buffett's 50% per year on small sums
Post by: rb on November 21, 2016, 07:52:11 PM
So here is a question, Walter Schloss, another acolyte of Graham, has been routinely described as somewhat of a dim bulb, at least as compared to Munger and Buffett.  So, gentlemen and woman of the jury, is it possible for the, ahem, less well intellectually endowed to make that 50%??  Assuming the right temperament, humility and clear definition of circle of competence.
Brilliant comment! It always surprised me why a hall of famer like Walter Schloss is marginalized while so many pray at the altar of the likes of Bill Ackman. Schloss was a fantastic investor. I guess he was just too cheap to hire a publicist.
Title: Re: Buffett's 50% per year on small sums
Post by: Jurgis on November 21, 2016, 08:09:42 PM
So here is a question, Walter Schloss, another acolyte of Graham, has been routinely described as somewhat of a dim bulb, at least as compared to Munger and Buffett.  So, gentlemen and woman of the jury, is it possible for the, ahem, less well intellectually endowed to make that 50%??  Assuming the right temperament, humility and clear definition of circle of competence.

Assuming it's not a trick question and assuming exchange-quoted investments only: No.

Temperament and shrewdness or entrepreneurship without stellar IQ might be enough to make this off-exchanges in some situations.

Although we always have Forest Gump as shining star.
Title: Re: Buffett's 50% per year on small sums
Post by: AzCactus on November 23, 2016, 08:33:52 AM
Just thinking through things...are there ANY managers anyone here knows who has averaged 50% per year for any reasonable length of time? This seems like Buffett just (or at least partially) saying something because you can't really prove him wrong on it.  He obviously manages a bit more than 1, 5 or 50 million....
Title: Re: Buffett's 50% per year on small sums
Post by: blainehodder on November 23, 2016, 09:04:27 AM
Not a manager, but Ericopoly has crushed the market like that.
Title: Re: Buffett's 50% per year on small sums
Post by: KCLarkin on November 23, 2016, 09:08:31 AM
FYI, he kind of answered this question recently:
https://blogs.rhsmith.umd.edu/davidkass/

Quote
Today, with $1 million, he and Charlie would probably invest in four stocks
Title: Re: Buffett's 50% per year on small sums
Post by: spartansaver on November 23, 2016, 09:36:42 AM
Bizaro86, are there any books you would recommend that walk you through your process or you thought were very helpful along the way. Seems like a fruitful area for people with small (relative to investment funds) sums of money.
Title: Re: Buffett's 50% per year on small sums
Post by: augustabound on November 23, 2016, 11:40:26 AM
I bought 11 properties from 2009-2013, and sold 6.

Just curious, based on your profile pic, are these all in Calgary?
Title: Re: Buffett's 50% per year on small sums
Post by: bci23 on November 23, 2016, 02:26:31 PM
So here is a question, Walter Schloss, another acolyte of Graham, has been routinely described as somewhat of a dim bulb, at least as compared to Munger and Buffett.  So, gentlemen and woman of the jury, is it possible for the, ahem, less well intellectually endowed to make that 50%??  Assuming the right temperament, humility and clear definition of circle of competence.

Assuming it's not a trick question and assuming exchange-quoted investments only: No.

Temperament and shrewdness or entrepreneurship without stellar IQ might be enough to make this off-exchanges in some situations.

Although we always have Forest Gump as shining star.

I don't think buffett ever implied he would earn 50%/yr in exchange traded investments only. Didn't he say something to the effect of "not just in stocks"? Implying his focus would be in off-exchange situations/ entrepreneurship. At least that was my interpretation.
Title: Re: Buffett's 50% per year on small sums
Post by: LR1400 on November 23, 2016, 09:22:14 PM
IQ seems to be the least important factor, at least when IQ is above average.

As important, if not more important for an entrepreneur:

1. Enough confidence to step out and try something/take a little risk.
2. Enough humility to hire smarter people in certain specific areas.
3. Drive and hustle. A deep drive to be successful, wealthy, rich, etc...
4. Preparation meets opportunity.

The people I know who have net worth of $50 million and up were above average intelligence but also had people working for them who were smarter in some certain area. The area could be finance, accounting, or operations/engineering.

The common characteristics were drive/desire to be rich, smart and frugal enough to avoid too much leverage and risk, and lastly, there was an outsized opportunity that they were smart enough and lucky enough to capitalize on.
Title: Re: Buffett's 50% per year on small sums
Post by: alwaysinvert on November 24, 2016, 12:45:53 PM
IQ seems to be the least important factor, at least when IQ is above average.

As important, if not more important for an entrepreneur:

1. Enough confidence to step out and try something/take a little risk.
2. Enough humility to hire smarter people in certain specific areas.
3. Drive and hustle. A deep drive to be successful, wealthy, rich, etc...
4. Preparation meets opportunity.

The people I know who have net worth of $50 million and up were above average intelligence but also had people working for them who were smarter in some certain area. The area could be finance, accounting, or operations/engineering.

The common characteristics were drive/desire to be rich, smart and frugal enough to avoid too much leverage and risk, and lastly, there was an outsized opportunity that they were smart enough and lucky enough to capitalize on.

I think you are probably very poorly calibrated as to what an average IQ actually constitutes. An IQ of 100 means you are average for the whole population, not scholarly unexceptional at an Ivy League School (average graduate IQ of 142) or even at college at large (113). You can judge for yourself how many dumb people you think you went to college with and chances are they are above average in IQ even if they performed poorly academically.

Merely above average IQ is by no means sufficient to be outstanding at any cognitively intense task. Buffett speaks of 120 being sufficient to be a good investor, which means 90% of the population is disqualified right off the bat. Personally, I think he might be quite generous in the assessment of the cutoff. Note also that all the attributes you mention most probably correlates positively with IQ, that is more intelligent people are more likely to fulfill them.
Title: Re: Buffett's 50% per year on small sums
Post by: InspireByReason on November 24, 2016, 05:09:00 PM
IQ seems to be the least important factor, at least when IQ is above average.

As important, if not more important for an entrepreneur:

1. Enough confidence to step out and try something/take a little risk.
2. Enough humility to hire smarter people in certain specific areas.
3. Drive and hustle. A deep drive to be successful, wealthy, rich, etc...
4. Preparation meets opportunity.

The people I know who have net worth of $50 million and up were above average intelligence but also had people working for them who were smarter in some certain area. The area could be finance, accounting, or operations/engineering.

The common characteristics were drive/desire to be rich, smart and frugal enough to avoid too much leverage and risk, and lastly, there was an outsized opportunity that they were smart enough and lucky enough to capitalize on.

I think you are probably very poorly calibrated as to what an average IQ actually constitutes. An IQ of 100 means you are average for the whole population, not scholarly unexceptional at an Ivy League School (average graduate IQ of 142) or even at college at large (113). You can judge for yourself how many dumb people you think you went to college with and chances are they are above average in IQ even if they performed poorly academically.

Merely above average IQ is by no means sufficient to be outstanding at any cognitively intense task. Buffett speaks of 120 being sufficient to be a good investor, which means 90% of the population is disqualified right off the bat. Personally, I think he might be quite generous in the assessment of the cutoff. Note also that all the attributes you mention most probably correlates positively with IQ, that is more intelligent people are more likely to fulfill them.

Someone here's looking for 7 foot bars to jump over.
Title: Re: Buffett's 50% per year on small sums
Post by: LR1400 on November 24, 2016, 09:53:40 PM
IQ seems to be the least important factor, at least when IQ is above average.

As important, if not more important for an entrepreneur:

1. Enough confidence to step out and try something/take a little risk.
2. Enough humility to hire smarter people in certain specific areas.
3. Drive and hustle. A deep drive to be successful, wealthy, rich, etc...
4. Preparation meets opportunity.

The people I know who have net worth of $50 million and up were above average intelligence but also had people working for them who were smarter in some certain area. The area could be finance, accounting, or operations/engineering.

The common characteristics were drive/desire to be rich, smart and frugal enough to avoid too much leverage and risk, and lastly, there was an outsized opportunity that they were smart enough and lucky enough to capitalize on.

I think you are probably very poorly calibrated as to what an average IQ actually constitutes. An IQ of 100 means you are average for the whole population, not scholarly unexceptional at an Ivy League School (average graduate IQ of 142) or even at college at large (113). You can judge for yourself how many dumb people you think you went to college with and chances are they are above average in IQ even if they performed poorly academically.

Merely above average IQ is by no means sufficient to be outstanding at any cognitively intense task. Buffett speaks of 120 being sufficient to be a good investor, which means 90% of the population is disqualified right off the bat. Personally, I think he might be quite generous in the assessment of the cutoff. Note also that all the attributes you mention most probably correlates positively with IQ, that is more intelligent people are more likely to fulfill them.

Fair enough.
I personally know people that I know I am smarter than, yet they are more wealthy than I am and more wealthy than I may ever be. They are more wealthy than 99% of the people on this board, unless this board is full of people who exceed $100Mill net worth or even $50mill net worth.

I do not believe a 145 IQ will lead to more success than a 135 IQ. Same with a 155 versus 145.

The people I know with the most wealth had an insatiable desire to be rich. They all have people who are smarter than them in a certain area, working for them. They are all extremely driven.
Title: Re: Buffett's 50% per year on small sums
Post by: alwaysinvert on November 25, 2016, 04:46:52 AM
IQ seems to be the least important factor, at least when IQ is above average.

As important, if not more important for an entrepreneur:

1. Enough confidence to step out and try something/take a little risk.
2. Enough humility to hire smarter people in certain specific areas.
3. Drive and hustle. A deep drive to be successful, wealthy, rich, etc...
4. Preparation meets opportunity.

The people I know who have net worth of $50 million and up were above average intelligence but also had people working for them who were smarter in some certain area. The area could be finance, accounting, or operations/engineering.

The common characteristics were drive/desire to be rich, smart and frugal enough to avoid too much leverage and risk, and lastly, there was an outsized opportunity that they were smart enough and lucky enough to capitalize on.

I think you are probably very poorly calibrated as to what an average IQ actually constitutes. An IQ of 100 means you are average for the whole population, not scholarly unexceptional at an Ivy League School (average graduate IQ of 142) or even at college at large (113). You can judge for yourself how many dumb people you think you went to college with and chances are they are above average in IQ even if they performed poorly academically.

Merely above average IQ is by no means sufficient to be outstanding at any cognitively intense task. Buffett speaks of 120 being sufficient to be a good investor, which means 90% of the population is disqualified right off the bat. Personally, I think he might be quite generous in the assessment of the cutoff. Note also that all the attributes you mention most probably correlates positively with IQ, that is more intelligent people are more likely to fulfill them.

Fair enough.
I personally know people that I know I am smarter than, yet they are more wealthy than I am and more wealthy than I may ever be. They are more wealthy than 99% of the people on this board, unless this board is full of people who exceed $100Mill net worth or even $50mill net worth.

I do not believe a 145 IQ will lead to more success than a 135 IQ. Same with a 155 versus 145.

The people I know with the most wealth had an insatiable desire to be rich. They all have people who are smarter than them in a certain area, working for them. They are all extremely driven.

You are right that there is nothing necessarily deterministic about 145 vs 135, but thinking a higher IQ doesn't equal higher earnings on average is a profound misunderstanding of what IQ is. Of course you aren't very likely to get rich if you have a high IQ and spend your days writing poems. All the data however suggests that, all else equal, higher IQ means more financial success. So you are wrong in that it doesn't matter above a certain point and anecdotal evidence or your personal belief doesn't really help your case.
Title: Re: Buffett's 50% per year on small sums
Post by: LR1400 on November 25, 2016, 06:47:58 AM
Show me this data please.

Title: Re: Buffett's 50% per year on small sums
Post by: alwaysinvert on November 25, 2016, 07:44:27 AM
Sure, here is a good readable breakdown: https://pumpkinperson.com/2016/02/11/the-incredible-correlation-between-iq-income/

Otherwise there is lots of academic literature on the subject and if you don't feel like consulting that you can read The Bell Curve. The conclusion, however, is the same wherever you go:  there is no evidence for the breakdown of the correlation between IQ and earnings above a certain threshold. In fact the evidence that exists points squarely in the opposite direction, at the very least if we are not talking about the extreme tail of the distribution where, due to the extremely small total population, outliers have potentially huge impact.

This doesn't mean you absolutely need a very high IQ to get rich, or that it is sufficient to get rich in and of itself, but I'm sure you understand that.
Title: Re: Buffett's 50% per year on small sums
Post by: bizaro86 on November 26, 2016, 01:57:58 PM
@Spartan I've read everything on real estate I can get my hands on. Most of it is crap. One author I like is William Nickerson. His books are horribly titled "How I turned 1000 into 1 million in real estate in my spare time" and old (the section about the benefits of desegregating an apartment building blew my mind that it was even a thing) but good on the mental models. The basic process he describes is to buy something that is in poor condition at a bigger discount than the cost of repairs, and then pyramid up to larger properties.

Personally, I have a few basic criteria. It has to have positive cash flow (after renovations) even assuming I put zero down. This eliminates basically everything, and leaves principal paydown as a worst case scenario.

The other thing is I want to buy at a discount to the current value, and a bigger discount to the after repaired value. If nothing works, don't buy. No called strikes.

@Augusta All in metro Calgary. The 4 lowest priced deals were all in a small town within commuting distance. I seriously considered doing Phoenix in 2009, but backed off on concerns if I went down to buy I might buy something inappropriate if I couldn't find anything that fit, since the travel would be a sunk cost.
Title: Re: Buffett's 50% per year on small sums
Post by: augustabound on November 26, 2016, 03:44:25 PM
@Augusta All in metro Calgary. The 4 lowest priced deals were all in a small town within commuting distance. I seriously considered doing Phoenix in 2009, but backed off on concerns if I went down to buy I might buy something inappropriate if I couldn't find anything that fit, since the travel would be a sunk cost.

There was a guy on another forum (Financial Webring Forum) and he was also featured in Moneysense, Jim Chuong, he invested in Phoenix around that time. He was buying 2br condos and homes for $30-40k (paid in cash, so no carrying costs) and renting them out for ~$1500 a month IIRC.

He found a reputable property management company so trips to Phoenix are rare I think. He also has multiple properties so the PM makes sense too.
Title: Re: Buffett's 50% per year on small sums
Post by: tombgrt on November 26, 2016, 05:28:21 PM
Personally, I have a few basic criteria. It has to have positive cash flow (after renovations) even assuming I put zero down. This eliminates basically everything, and leaves principal paydown as a worst case scenario.



What do you mean with cash flow positive exactly? Net positive cash inflow after paying for mortgage and other costs?  ??? How is that possible? Where does such an inefficient market find these stupid renters? Maybe I'm misunderstanding you. Maybe you include principal paydown in your cash flow?

Wouldn't even come close here. I'm renting a brand new home at an estimated 2.4-2.8% rental yield (depending on whether you include one time property taxes, which you should) for the buyer. Buying it without personal equity inlay would cost me double with an intrest free mortgage over 20 years.
Title: Re: Buffett's 50% per year on small sums
Post by: bizaro86 on November 26, 2016, 06:40:02 PM
@Augusta All in metro Calgary. The 4 lowest priced deals were all in a small town within commuting distance. I seriously considered doing Phoenix in 2009, but backed off on concerns if I went down to buy I might buy something inappropriate if I couldn't find anything that fit, since the travel would be a sunk cost.

There was a guy on another forum (Financial Webring Forum) and he was also featured in Moneysense, Jim Chuong, he invested in Phoenix around that time. He was buying 2br condos and homes for $30-40k (paid in cash, so no carrying costs) and renting them out for ~$1500 a month IIRC.

He found a reputable property management company so trips to Phoenix are rare I think. He also has multiple properties so the PM makes sense too.

I've spent some time talking with Jim in the past. I considered buying in Phoenix at the same time, and didn't. I was lazy and stayed in my comfort zone. I was never negative about it, which was common among Canadian real estate investors, but didn't pull the trigger. I would have made more money had I done that.
Title: Re: Buffett's 50% per year on small sums
Post by: bizaro86 on November 26, 2016, 06:54:09 PM

What do you mean with cash flow positive exactly? Net positive cash inflow after paying for mortgage and other costs?  ??? How is that possible? Where does such an inefficient market find these stupid renters? Maybe I'm misunderstanding you. Maybe you include principal paydown in your cash flow?

Wouldn't even come close here. I'm renting a brand new home at an estimated 2.4-2.8% rental yield (depending on whether you include one time property taxes, which you should) for the buyer. Buying it without personal equity inlay would cost me double with an intrest free mortgage over 20 years.

By cash flow positive I mean cash in after paying mortgage principal/interest, condo fees, property taxes, insurance, repairs, etc. Basically everything. I do self manage, so that is a cost I'm generally not considering that I probably should.

I would never buy anything at <3% rental yield. Rough metrics on my best cash flow deal:

Purchase + renovations + closing: 160k

Rent: 1500/month
1st Mortgage, 120k@4%, 30 year amortisation: $570/month
HELOC for 40k, interest only at 3.5%: $117/month
Condo Fees (including heat/water/sewer): $400/month
Property Taxes: $90/month
Landlord Insurance: $12/month
Repairs/maintenance: $50/month average
Costs: $1239/month

That works out to a 7% going-in cap rate, which isn't unheard of for a real estate investment, although it is quite good a residential rental where I live. The condo corp (HOA) of this building was in shambles when I bought it. I had to take some (not very complicated) legal actions to get the documents in order, then get a proper building manager hired. Most of the other owners were victims of some sort of mortgage fraud, my unit got foreclosed on and I bought it from the bank.

I would say the market inefficiency isn't in the renters (you only ever get market rent), its in the purchase market. This condo was worth well over $200k after I took some fairly simple actions. But, most people wouldn't want to be bothered doing that.

I'm still holding on to my dry powder, as the foreclosures from the oil price induced economic drop here haven't made it through the system in earnest yet. If you're seriously interested in RE investment and the rental yields where you live are 2.5%, I'd just do it somewhere else. I would have done better to buy in Phoenix in 2009 than Calgary, and if I had capital that needed a home in RE I'd still put it in the US.
Title: Re: Buffett's 50% per year on small sums
Post by: Buffett_Groupie on November 26, 2016, 08:48:23 PM
I think consensus is that 50% is hard to unachievable.

Arb? - not at this time.
Value stocks in foreign exchanges? - maybe. Doubtful you can get 50%, but maybe.
Moaty situations in small caps? - I doubt there's many (any?).
US micro/nanocaps? - If you select best ideas from CoBF and other microcap investors, yeah, you could make maybe 20-30% a year. I don't see 50%.
Distressed debt? - maybe, but situational. Picasso is da man.
Control situations? - really? from what I've seen here most of them are tough and rather crapshoot.
Spinoffs? - not really.

Am I missing any other ideas/areas?

Edit: I somewhat skipped really situational ideas like levered Florida houses in 2010 or so...

Just because Buffett stated he could achieve 50% with a smaller sum, it by no means he implies the rest of us (or everyone else) can do so!  :)
Title: Re: Buffett's 50% per year on small sums
Post by: philippoc93 on November 26, 2016, 10:51:47 PM

What do you mean with cash flow positive exactly? Net positive cash inflow after paying for mortgage and other costs?  ??? How is that possible? Where does such an inefficient market find these stupid renters? Maybe I'm misunderstanding you. Maybe you include principal paydown in your cash flow?

Wouldn't even come close here. I'm renting a brand new home at an estimated 2.4-2.8% rental yield (depending on whether you include one time property taxes, which you should) for the buyer. Buying it without personal equity inlay would cost me double with an intrest free mortgage over 20 years.

By cash flow positive I mean cash in after paying mortgage principal/interest, condo fees, property taxes, insurance, repairs, etc. Basically everything. I do self manage, so that is a cost I'm generally not considering that I probably should.

I would never buy anything at <3% rental yield. Rough metrics on my best cash flow deal:

Purchase + renovations + closing: 160k

Rent: 1500/month
1st Mortgage, 120k@4%, 30 year amortisation: $570/month
HELOC for 40k, interest only at 3.5%: $117/month
Condo Fees (including heat/water/sewer): $400/month
Property Taxes: $90/month
Landlord Insurance: $12/month
Repairs/maintenance: $50/month average
Costs: $1239/month

That works out to a 7% going-in cap rate, which isn't unheard of for a real estate investment, although it is quite good a residential rental where I live. The condo corp (HOA) of this building was in shambles when I bought it. I had to take some (not very complicated) legal actions to get the documents in order, then get a proper building manager hired. Most of the other owners were victims of some sort of mortgage fraud, my unit got foreclosed on and I bought it from the bank.

I would say the market inefficiency isn't in the renters (you only ever get market rent), its in the purchase market. This condo was worth well over $200k after I took some fairly simple actions. But, most people wouldn't want to be bothered doing that.

I'm still holding on to my dry powder, as the foreclosures from the oil price induced economic drop here haven't made it through the system in earnest yet. If you're seriously interested in RE investment and the rental yields where you live are 2.5%, I'd just do it somewhere else. I would have done better to buy in Phoenix in 2009 than Calgary, and if I had capital that needed a home in RE I'd still put it in the US.

Thanks for sharing Bizaro. I just got the book by William Nickerson and will read. You guys are a little more fortunate in the US in that you have so many little micro markets within the greater US housing market. There will always be some sort of inefficiency to exploit somewhere. Being from Ireland, the time for half priced € (RE on the cheap) came and went in 2009-2011, but my father also made some very good purchases off banks back then, a few office buildings and houses for 30-40% of cost of construction. People and the backs were in a real bind and just jumping at any offer to get some liquidity. Opportunity of a lifetime.

The market is now fully priced and the only place to make money is in development in Dublin, but the capital required is immense and the big boys have already moved in i.e. Cairn Homes.

My thoughts on 50% returns - definitely possible, Samir Patel of Askeladden Capital is up 56% gross for the year as per his Q3 letter. He's only 22 years old too- http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/the-22-year-old-hedge-fund-manager/



Title: Re: Buffett's 50% per year on small sums
Post by: spartansaver on November 28, 2016, 01:45:45 PM
@Bizaro86 - Thanks for the reply, I will definitely check Nickerson out.
Title: Re: Buffett's 50% per year on small sums
Post by: racemize on November 28, 2016, 03:39:28 PM
We have several board members that have 30% compounded rates over pretty long periods.  Eric's are well over 50% in his IRA I believe.  Packer has a long 30% record.  I think Al is around there too?  Not totally sure.  My shorter record is 30%.

I imagine if we were Buffett and full time, we could add an extra 20%.

Addendum: I don't really think this matters that much anyway.  We aren't Buffett.  We are who we are.  Good returns are good enough.
Title: Re: Buffett's 50% per year on small sums
Post by: Ballinvarosig Investors on November 29, 2016, 04:17:01 AM
Buffett said that if you look at stocks 52 week highs and lows, more often than not, the spread between the two is around 100%, from low to high.

So I think he is banking on capturing this spread when he is saying he could do 50% per year on small sums.
I would almost certainly say that this is what Warren would be doing today if he was looking for out-sized returns in stocks with a small amount of capital.

We know that Warren has a photographic memory, and we also know that his mental filing cabinet has a record of every listed company in America that is of any appreciable size. Let's say every week we get 20 companies that are hitting a new low. If we say 95% are hitting those new lows because they are bad businesses or are in structural decline, that still leaves us with 1 company a week that is worthy of further investigation. If you've got a 4 stock punch card for even just a year, you can be incredibly selective in choosing the four winners from those 52 stocks that are pitched to you every year. Of course, all this requires a massive amount of patience to just sit and wait for the fat pitch. It requires a massive amount of work to be able to react to the pitches without having to spend days researching a company. Most importantly, it requires a massive amount of accumulated knowledge. Remember that Warren is not just a compounder of money, he compounds information and this is what gives him his competitive advantage. If Warren gets presented Company X at $10, he can act there and then. His self-control and discipline are also off the scale. Remember the story Walter Schloss told were Warren was willing to buy a stock at $10, but as the weeks went on, he dropped his bid a few times, and eventually got the stock at even less than what he wanted to buy?

On this topic, I really think that Alice Schroeder really captured best how Warren would be investing with small amounts of capital. In my opinion, the below articles/videos from Alice are worth reviewing several times a year.

https://www.youtube.com/watch?v=PnTm2F6kiRQ
http://seekingalpha.com/article/235292-behind-the-scenes-with-buffett-s-biographer-alice-schroeder
https://www.reddit.com/r/investing/comments/2550vq/hi_im_alice_schroeder_author_of_the_snowball/

Doo Dilligence - you said Warren is a closet market timer. I suspect there is a shred of truth in that. Buying below intrinsic value is obviously the most important thing, but I suspect that Warren has so much experience in the market that he has an intuitive feel on (roughly) when exactly is the right time to buy.
Title: Re: Buffett's 50% per year on small sums
Post by: Uccmal on November 29, 2016, 05:09:59 AM
We have several board members that have 30% compounded rates over pretty long periods.  Eric's are well over 50% in his IRA I believe.  Packer has a long 30% record.  I think Al is around there too?  Not totally sure.  My shorter record is 30%.

I imagine if we were Buffett and full time, we could add an extra 20%.

Addendum: I don't really think this matters that much anyway.  We aren't Buffett.  We are who we are.  Good returns are good enough.

Around low to mid 20s after tax.... 

Sometimes I think this whole game is just gambling.  It all reminds me more of poker than anything else.  A really long facelss poker game against a huge number of opponents.   The hard skills of reading balance sheets and endless financial reports give you a snapshot in time of where a company, or industry may be at, which is worth knowing, if only, to eliminate most companies. The real skills that Buffett possesses are in the realm of human psychology, self knowledge, and self discipline. 

We hear alot of seemingly pithy quotes from Buffett such as the:
- fat man coming into a  room or 7 foot basketball player quote
- be greedy when others are fearful
- we dont want to jump hurdles - just step over one foot tall hurdle
- go where the puck is going, not where it is - okay not Buffett
Now Buffett definitely knows his financial reports but I suspect what he knows more about is their limitations.  These quotes and others show you how that he has a really strong grasp of human nature, and human behaviour.  He isn't the only one, but he is probably the best at it.  Someone has to be best. 
Title: Re: Buffett's 50% per year on small sums
Post by: netnet on November 30, 2016, 04:11:40 PM
Quote
On this topic, I really think that Alice Schroeder really captured best how Warren would be investing with small amounts of capital. In my opinion, the below articles/videos from Alice are worth reviewing several times a year.

https://www.youtube.com/watch?v=PnTm2F6kiRQ
http://seekingalpha.com/article/235292-behind-the-scenes-with-buffett-s-biographer-alice-schroeder
https://www.reddit.com/r/investing/comments/2550vq/hi_im_alice_schroeder_author_of_the_snowball/


Amusing quote from Schroeder in the YouTube video, Buffett has made so much money that "when he writes the check the bank bounces!"

Title: Re: Buffett's 50% per year on small sums
Post by: netnet on July 08, 2020, 02:27:21 PM
This is an evergreen topic.

The Acquirer's multiple discusses 'what would Buffett do' (WWBD) in a podcast.
https://acquirersmultiple.com/2020/07/how-would-a-young-warren-buffett-invest-today/ (https://acquirersmultiple.com/2020/07/how-would-a-young-warren-buffett-invest-today/)

The funny thing is I would guess that >80% of the people on this CoBF fall into this portfolio size category, yet obviously few are within spitting distance of Buffett like returns, i.e. 50%, yet I have to believe that making 30% per year is really doable, by say at least 10% of the people on this board.  Maybe it's like the joke Munger said about Mozart, if you are asking questions about writing symphonies at 15 then you aren't Mozart.

I think that one of the best mental models is to first set your opportunity costs to >20% per year and evaluate from there.  That would steer you away from Constellation or BRK, or all manner of value traps.
Title: Re: Buffett's 50% per year on small sums
Post by: Jurgis on July 08, 2020, 03:20:32 PM
This is an evergreen topic.

The Acquirer's multiple discusses 'what would Buffett do' (WWBD) in a podcast.
https://acquirersmultiple.com/2020/07/how-would-a-young-warren-buffett-invest-today/ (https://acquirersmultiple.com/2020/07/how-would-a-young-warren-buffett-invest-today/)

The funny thing is I would guess that >80% of the people on this CoBF fall into this portfolio size category, yet obviously few are within spitting distance of Buffett like returns, i.e. 50%, yet I have to believe that making 30% per year is really doable, by say at least 10% of the people on this board.  Maybe it's like the joke Munger said about Mozart, if you are asking questions about writing symphonies at 15 then you aren't Mozart.

I think that one of the best mental models is to first set your opportunity costs to >20% per year and evaluate from there.  That would steer you away from Constellation or BRK, or all manner of value traps.

There might be people who did 20% or even 30% per year in the last 5-10 years.
I am sure that I would never make myself hold their portfolios.  ::)
I am not Mozart.

But then if/when I look at the documented returns of pretty-famous or at least quotable people who started and run (hedge)funds, none of them have made 20%+ annual in last 5 or 10 years. In fact, most of them struggle against SP500.
Title: Re: Buffett's 50% per year on small sums
Post by: cherzeca on July 08, 2020, 08:06:38 PM
I once talked to an investor who made >50% annual returns consistently investing in growing businesses in Africa.  I suggested to him that I couldn't stomach the risk of not knowing the applicability of the rule of law, lack of liquidity, currency fluctuation etc.  He said all of this didn't concern him, and it was hard to argue with his results.  I prefer to look for my lost key by the lamppost were I can see, and those >50% returns are like a key lost in the darkness where the key most likely is.
Title: Re: Buffett's 50% per year on small sums
Post by: scorpioncapital on July 09, 2020, 04:22:56 AM
How sure is it your friend was not lucky or following a multi year trend? Even today Robinhood investors are making good money on buying shares in bankrupt companies. Will this last forever?
Title: Re: Buffett's 50% per year on small sums
Post by: Mephistopheles on July 09, 2020, 06:58:41 AM
I once talked to an investor who made >50% annual returns consistently investing in growing businesses in Africa.  I suggested to him that I couldn't stomach the risk of not knowing the applicability of the rule of law, lack of liquidity, currency fluctuation etc.  He said all of this didn't concern him, and it was hard to argue with his results.  I prefer to look for my lost key by the lamppost were I can see, and those >50% returns are like a key lost in the darkness where the key most likely is.

To your point, Cherzeca, I just read this article yesterday. It's about two brothers from New Zealand who have one of the best track records of all time. 36% CAGR over 20 years (1986-2006). They tended to invest in new markets where others may not be as familiar such as Brazil, Eastern Europe, Russia, before everyone else did.

https://www.institutionalinvestor.com/article/b150nr9k08bfxb/secrets-of-sovereign
https://macro-ops.com/the-chandler-brothers-the-greatest-investors-youve-never-heard-of/
Title: Re: Buffett's 50% per year on small sums
Post by: cherzeca on July 09, 2020, 10:24:23 AM
I once talked to an investor who made >50% annual returns consistently investing in growing businesses in Africa.  I suggested to him that I couldn't stomach the risk of not knowing the applicability of the rule of law, lack of liquidity, currency fluctuation etc.  He said all of this didn't concern him, and it was hard to argue with his results.  I prefer to look for my lost key by the lamppost were I can see, and those >50% returns are like a key lost in the darkness where the key most likely is.

To your point, Cherzeca, I just read this article yesterday. It's about two brothers from New Zealand who have one of the best track records of all time. 36% CAGR over 20 years (1986-2006). They tended to invest in new markets where others may not be as familiar such as Brazil, Eastern Europe, Russia, before everyone else did.

https://www.institutionalinvestor.com/article/b150nr9k08bfxb/secrets-of-sovereign
https://macro-ops.com/the-chandler-brothers-the-greatest-investors-youve-never-heard-of/

he had a filter of EV=3X cash flow.  he also had a somewhat unique MO of hiring recent business/accounting college grads to monitor investments in Africa...good pay and "adventure" which apparently yielded no shortage of talent...so that he did everything from his stateside desk
Title: Re: Buffett's 50% per year on small sums
Post by: Jurgis on July 09, 2020, 10:31:10 AM
It's interesting. People talk Africa and unknown markets for 30%+ returns. But then you look at Fairfax India and Fairfax Africa and they've done really crappily. And small/micro cap value international investors with small capital pools that I follow have not done greatly either.
Title: Re: Buffett's 50% per year on small sums
Post by: cherzeca on July 12, 2020, 10:06:53 AM
It's interesting. People talk Africa and unknown markets for 30%+ returns. But then you look at Fairfax India and Fairfax Africa and they've done really crappily. And small/micro cap value international investors with small capital pools that I follow have not done greatly either.

it is my understanding that some the third party money this investor that I talked to used came from prominent Africa-located businessmen who offered sourcing and insight (ground-based wisdom), and were happy to have this investor wear a beard for them, offer professional investment management etc...so like everything else, you have to have good intel
Title: Re: Buffett's 50% per year on small sums
Post by: LanceSanity on July 17, 2020, 06:28:05 PM
Has anyone heard of Abdiel Capital? They've been making over 50% a year for 5 years
Title: Re: Buffett's 50% per year on small sums
Post by: AzCactus on July 20, 2020, 08:01:01 AM
Lance, do you have any letters or writings about their thoughts on market, portfolio selection etc?
Title: Re: Buffett's 50% per year on small sums
Post by: Jurgis on July 20, 2020, 08:19:25 AM
https://whalewisdom.com/filer/abdiel-capital-advisors-llc#:~:text=Abdiel%20Capital%20Advisors%20is%20based%20out%20of%20New,and%20a%20top%2010%20holdings%20concentration%20of%20100.0%25.

Looks like mostly software/cloud growth portfolio. Not surprising that they did well, although still kudos for 50%+ annual (if true).
If they were a mutual fund/ETF, I might invest with them. Although likely right now is not a great time with growth names trading in the stratosphere.

Edit: I took a brief look at their portfolio.
I have to say additional kudos for investing in AYX and APPN years ago. Both of these are not your standard recent-startup-hyper-growth-gonna-conquer-the-world companies. Both have been established long time ago and apparently only recently got into (hyper)growth phase. IMO such companies are difficult to find: most old companies don't just start (hyper)growing, so the natural tendency in the growth universe is to discard old companies that have not done much for years. Noticing that old company is at inflection point can make you the 50%+ annual returns. 8) If this was not a fluke, then Abdiel seems to have done good DD.

See https://en.wikipedia.org/wiki/Alteryx https://en.wikipedia.org/wiki/Appian_Corporation
Title: Re: Buffett's 50% per year on small sums
Post by: AzCactus on July 20, 2020, 08:37:28 AM
https://whalewisdom.com/filer/abdiel-capital-advisors-llc#:~:text=Abdiel%20Capital%20Advisors%20is%20based%20out%20of%20New,and%20a%20top%2010%20holdings%20concentration%20of%20100.0%25.

Looks like mostly software/cloud growth portfolio. Not surprising that they did well, although still kudos for 50%+ annual (if true).
If they were a mutual fund/ETF, I might invest with them. Although likely right now is not a great time with growth names trading in the stratosphere.

Thanks Jurgis.  True that they have owned some of these names for 3+ years.  But some of the names (typically smaller positions are a bit newer including Slack. 
Title: Re: Buffett's 50% per year on small sums
Post by: Vish_ram on July 20, 2020, 10:21:41 AM
If you don't own growth and just focus on hard core value investing ,then making $ is very hard.

Over several years I gradually shifted from value to growth. I understand the absurdity of this as Buffett says they both are joined at the hip. I started making good $ for me and my clients with this approach (outperforming S&P 500 over several years).

Here are some thumb rules:
1) You need some core expertise in at least one area (like software, telecom, cloud , security etc)
2) Value investors don't lack the ability or knowledge, but lack the imagination to invest in growth. They want to see everything upfront (earnings, cash flow etc) before committing up front. The market is too smart for that. Market prices in potential upside.

Let me illustrate with an example:
Imagine Microsoft O/S that is growing well (30 years ago). If you value MSFT purely on O/S you will see that it is very expensive. The TAM may not appear to be that high. But if the company is at nascent stage of bringing ancillary products like word, excel etc then the TAM dramatically goes up over time. It hasn't happened yet, but will happen over time.

The leverage they've on one product will help them expand to others over time. There are many many examples in other companies as well. Market pro-actively prices it in.

In general MOST growth stocks are way undervalued (how else do you explain the subsequent superior returns).

Yes, when growth falters or margins shrink, it'll take a plunge. This was the case of MSFT during 18 years that it under performed.

3) Diversification is the key. This is why concentration will either produce terrible results in general. Value investors take so much pride in taking concentrated portfolio. This is the dumbest approach (you are not Buffett). Buffett should be sent to prison for few months for giving such a bad advice to his countless acolytes and ruining their portfolio.

4) Understanding of macro helps. If you have an approach of raising cash when yield curve inverts and Fed tightens, sell/trim when valuation of growth becomes really insane (like trading at 50-80 times sales) you'll do better.

5) Never get too attached to any growth stocks.

6) In growth investing, EARNINGS ARE FOR LOSERS. Bezos said if any of their subsidiary produces profit, they are not doing a good job.
You need to take an owner view. Say you have an omelette shop. Do you think of producing the max. profit? No ,you work on growth , reinvestment of all capital to grow more. The GAAP losses are sowing the seeds for future growth. the SG&A you incur now is building the foundation for future.
yes, it all depends on if the end state is something that can produce 20% FCF margin. This involves understanding the biz, industry, TAM, competition, and so many factors.

YOu constantly have to filter and refine the criteria for owning. No one understands a company fully (not even the CEO). No One knows the future. It is all calculated risk taking.

Even the greatest investor of all time, Buffett, started showing improved performance when he started paying up for growth.

Title: Re: Buffett's 50% per year on small sums
Post by: Jurgis on July 20, 2020, 11:21:30 AM
https://whalewisdom.com/filer/abdiel-capital-advisors-llc#:~:text=Abdiel%20Capital%20Advisors%20is%20based%20out%20of%20New,and%20a%20top%2010%20holdings%20concentration%20of%20100.0%25.

Looks like mostly software/cloud growth portfolio. Not surprising that they did well, although still kudos for 50%+ annual (if true).
If they were a mutual fund/ETF, I might invest with them. Although likely right now is not a great time with growth names trading in the stratosphere.

Thanks Jurgis.  True that they have owned some of these names for 3+ years.  But some of the names (typically smaller positions are a bit newer including Slack.

Yes. The newer positions are much more the "mainstream" growth/Motley Fool Rule Breakers/Robinhood/momo. Which is a possible risk, since Abdiel may have less of a variant perception and the prices they are paying are way higher.
Title: Re: Buffett's 50% per year on small sums
Post by: Jurgis on July 20, 2020, 11:38:42 AM
@Vish_ram touched one big point that I have raised previously: the difficulty of investing into growth stocks is that the ultimate TAM is tough to know. The ultimate TAM is what makes growth investing work. But it is also one of the big risks.

For successful companies like Google, Apple, Microsoft the ultimate TAM is way bigger than what you expected when you invested. E.g. if you bought Apple for iPod TAM, it was overpriced (likely), but then came iPhone TAM. Same with Microsoft (DOS -> Office -> Windows, etc.) and Google (desktop search -> mobile search -> Android -> Ads, etc.) and Netflix (DVDs -> Streaming -> Content). This might be the argument why SHOP might have (a lot of?) growth left: they could conquer adjacent TAMs that are not visible right now.

OTOH, you don't really know if a company will successfully shift into new TAM. For each Google, Apple, Microsoft, there's a bunch of companies that did not shift/find new TAM and pretty much burned out. Paying high growth price for such companies leads to painful results. This might not be visible now after 10 years of tech bull market, but it might be visible. Let's see how Uber does, for example. Less dramatic examples might be QCOM, INTC. Pretty dead ones might be Fitbit, GoPro, etc.

So it's not that trivial to predict how the TAM will evolve. Selling on sales slowdown might seem attractive, but it would have missed you huge returns on Microsoft, Apple, Netflix, etc. OTOH, it probably would have saved you from the companies that slowed down and then pretty much died.

Although I do diversify, I disagree that diversification is key for growth investing. If you put your money into Google. Or Facebook. Or CRM. Or Netflix. You could have retired many times by now. So really diversification is - like Buffett said - for people who don't know companies in depth.

I also disagree with "Never get too attached to any growth stocks.". Once again Buffett is right: for real growth stocks the time to sell is never. Let me add Akre holdings like AMT to that list. And yeah, AKREX sells very infrequently. And there are other successful growth investors who behave the same.

But hey, people are paying for growth now. Valuations are very high. So perhaps this is not the best time to switch to growth or to hold forever.  8)
Title: Re: Buffett's 50% per year on small sums
Post by: Tim Eriksen on July 20, 2020, 11:50:54 AM

In general MOST growth stocks are way undervalued (how else do you explain the subsequent superior returns).

Yes, when growth falters or margins shrink, it'll take a plunge. This was the case of MSFT during 18 years that it under performed.


Can I quibble here?  Most growth stocks are overvalued since growth will not materialize to level the stock price is implying; however, for the growth stocks that do grow over the long term they are undervalued because they not only meet expectations but likely surpass them.   

Subsequent returns in the short term are often due to changes in expectations not improvements in long term prospects.     
Title: Re: Buffett's 50% per year on small sums
Post by: Vish_ram on July 20, 2020, 12:17:22 PM
Yes, it depends on how you look at it.

If current revenue is a small fraction of TAM, and if the company is a leader, then it is undervalued on average.
If a company’s entire functionality is just a feature in a competitors integrated suite, then it is trouble.

I stay clear of no moat that doesn’t have stickiness. I avoid of Semis even thought many have done well. I’m perfectly ok not owning many of them.

When Tesla traded at 180, I ran several excel models and thought that the present price is justified if they get 30% of world market share in 20 years. I thought it was so far fetched, but boy I was wrong. The way things are going they might end up with 50% share. As Chamath says , IC autos will eventually go bankrupt due to diseconomies of scale. Think of SHLD in action.
Title: Re: Buffett's 50% per year on small sums
Post by: LC on July 20, 2020, 12:27:47 PM
Quote
2) Value investors don't lack the ability or knowledge, but lack the imagination to invest in growth. They want to see everything upfront (earnings, cash flow etc) before committing up front. The market is too smart for that. Market prices in potential upside.

My main gripe with "textbook" value investing is the lack of understanding of the above, and also the poor ability to differentiate between expected vs. realized return.
Title: Re: Buffett's 50% per year on small sums
Post by: valueinvestor on July 20, 2020, 12:42:57 PM

In general MOST growth stocks are way undervalued (how else do you explain the subsequent superior returns).

Yes, when growth falters or margins shrink, it'll take a plunge. This was the case of MSFT during 18 years that it under performed.


Can I quibble here?  Most growth stocks are overvalued since growth will not materialize to level the stock price is implying; however, for the growth stocks that do grow over the long term they are undervalued because they not only meet expectations but likely surpass them.   

Subsequent returns in the short term are often due to changes in expectations not improvements in long term prospects.   

+1
Title: Re: Buffett's 50% per year on small sums
Post by: Vish_ram on July 20, 2020, 01:23:42 PM
Let me restate my comment differently

99% of growth stocks are either extremely undervalued or overvalued; only time reveals the truth.

The general perception is that most growth stocks are overvalued, which is incorrect.


In general MOST growth stocks are way undervalued (how else do you explain the subsequent superior returns).

Yes, when growth falters or margins shrink, it'll take a plunge. This was the case of MSFT during 18 years that it under performed.


Can I quibble here?  Most growth stocks are overvalued since growth will not materialize to level the stock price is implying; however, for the growth stocks that do grow over the long term they are undervalued because they not only meet expectations but likely surpass them.   

Subsequent returns in the short term are often due to changes in expectations not improvements in long term prospects.   
Title: Re: Buffett's 50% per year on small sums
Post by: Tim Eriksen on July 20, 2020, 06:58:31 PM

The general perception is that most growth stocks are overvalued, which is incorrect.


What is the evidence for this?  Historical studies have shown the opposite to be true.  Has that changed recently? 
Title: Re: Buffett's 50% per year on small sums
Post by: writser on July 21, 2020, 01:10:55 AM
2) Value investors don't lack the ability or knowledge, but lack the imagination to invest in growth. They want to see everything upfront (earnings, cash flow etc) before committing up front. The market is too smart for that. Market prices in potential upside.

I think such generalities are nonsensical. Value investing is simply paying less than you get. That does NOT mean buying a terrible business at an 6x multiple automatically leads to outperformance. It also does NOT mean that buying a great business at a 200x multiple automatically leads to outperformance. Either one could be too cheap, too expensive or about fairly valued. Unfortunately you simply have to think about what you are buying, do due diligence, model the company in question, think about the actors involved, make assumptions, try to falsify those assumptions and think about why the market valuation could be wrong. That's called: work. Nobody likes it. If "imagination" was a substitute for that I'd be a billionaire but I don't think it is.

If you presume in advance that buying a balance sheet play, or a low multiple play, does not work because 'the market is too smart for that' yet you assume that you can outperform by buying growth stocks because 'the market does not have my imagination' I think you are giving the market not enough credit and you are also limiting your own options.
Title: Re: Buffett's 50% per year on small sums
Post by: Gregmal on July 21, 2020, 06:23:51 AM
2) Value investors don't lack the ability or knowledge, but lack the imagination to invest in growth. They want to see everything upfront (earnings, cash flow etc) before committing up front. The market is too smart for that. Market prices in potential upside.

I think such generalities are nonsensical. Value investing is simply paying less than you get. That does NOT mean buying a terrible business at an 6x multiple automatically leads to outperformance. It also does NOT mean that buying a great business at a 200x multiple automatically leads to outperformance. Either one could be too cheap, too expensive or about fairly valued. Unfortunately you simply have to think about what you are buying, do due diligence, model the company in question, think about the actors involved, make assumptions, try to falsify those assumptions and think about why the market valuation could be wrong. That's called: work. Nobody likes it. If "imagination" was a substitute for that I'd be a billionaire but I don't think it is.

If you presume in advance that buying a balance sheet play, or a low multiple play, does not work because 'the market is too smart for that' yet you assume that you can outperform by buying growth stocks because 'the market does not have my imagination' I think you are giving the market not enough credit and you are also limiting your own options.

+10

Flexibility with respect to ones mindset and ever changing data is the all important attribute. Imagination by itself can be both awfully good and awfully bad. I see plenty of people on social media "imagining" the next EV powerhouse or COVID vaccine candidate and "imagining" their calls going up 100x by Friday. Imagine that?
Title: Re: Buffett's 50% per year on small sums
Post by: KJP on July 21, 2020, 07:45:40 AM
If your first rule is to not lose capital, then you look for things in which you have high confidence in your ability to predict or project into the future.  The ability to predict is correlated with the pace of change.  So, if your first rule is not to lose capital, then you would tend to seek out very stable industries.  Stable industries, in turn, don't lend themselves to high growth, because high growth is often a byproduct of newness and can itself attract competition and unpredictability.  So if your first principles are steering you to slow growth industries, then you better have a sharp focus on current valuation according to traditional metrics.  This approach produces bad results if either you pay to much or you're wrong about the rate of change and rather than buying into a stable industry/business, you're buying into a decaying one (thus the potential danger of blindly buying anything with a single-digit multiple).  The traditional ways to address these risks are skilled qualitative assessment (Buffett) or high diversification across apparently attractive quantitative characteristics (Schloss).

So, I don't think the traditional value approach stems from a lack of imagination.  Rather, it's a predictable outcome of focusing on downside rather than upside. 
Title: Re: Buffett's 50% per year on small sums
Post by: Munger_Disciple on July 21, 2020, 08:26:11 AM
If your first rule is to not lose capital, then you look for things in which you have high confidence in your ability to predict or project into the future.  The ability to predict is correlated with the pace of change.  So, if your first rule is not to lose capital, then you would tend to seek out very stable industries.  Stable industries, in turn, don't lend themselves to high growth, because high growth is often a byproduct of newness and can itself attract competition and unpredictability.  So if your first principles are steering you to slow growth industries, then you better have a sharp focus on current valuation according to traditional metrics.  This approach produces bad results if either you pay to much or you're wrong about the rate of change and rather than buying into a stable industry/business, you're buying into a decaying one (thus the potential danger of blindly buying anything with a single-digit multiple).  The traditional ways to address these risks are skilled qualitative assessment (Buffett) or high diversification across apparently attractive quantitative characteristics (Schloss).

So, I don't think the traditional value approach stems from a lack of imagination.  Rather, it's a predictable outcome of focusing on downside rather than upside. 

+1

Excellent post KJP. Bill Ruane who founded Sequoia Fund once said (when asked about the secret to their success) they were really closet bears. That says it all!
Title: Re: Buffett's 50% per year on small sums
Post by: cherzeca on July 21, 2020, 11:31:40 AM
you are not going to get 50% PA returns as a value investor unless you can "imagine" a catalyst. that is not to say that value investing's focusing on the downside doesn't make sense, but you have to be able to not only understand value but also understand how that value can accelerate...hence some focus must be made on the upside catalyst probabilities.  I actually think value investing with a special situation/catalyst focus lets you buy cheaper opportunities for value acceleration (since not everyone will see the catalyst) than growth investing where paying up for the upside is built into the buy price
Title: Re: Buffett's 50% per year on small sums
Post by: wabuffo on July 21, 2020, 11:55:50 AM
I continue to maintain that anyone with a proven 50% CAGR track record over 5+ years can only get there with the use of leverage/margin.  If its real estate, then there are mortgages/borrowed money involved.  If its equities, then there is option usage (which is also another form of leverage).   

Even Buffett during his BPL days would often use borrowed funds up to 25% of portfolio assets (usually on the workout portion of the portfolio).  Greenblatt talks about using WFC LEAPS during his salad days of the early 90s.

I think "god-mode" on a long-only equity portfolio with no margin/leverage probably maxes out in the high 25-29% range over 5 years in average markets (ie, +15-20% better than the equity benchmarks). 

wabuffo
Title: Re: Buffett's 50% per year on small sums
Post by: Gregmal on July 21, 2020, 12:01:52 PM
I continue to maintain that anyone with a proven 50% CAGR track record over 5+ years can only get there with the use of leverage/margin.  If its real estate, then there are mortgages/borrowed money involved.  If its equities, then there is option usage (which is also another form of leverage).   

Even Buffett during his BPL days would often use borrowed funds up to 25% of portfolio assets (usually on the workout portion of the portfolio).  Greenblatt talks about using WFC LEAPS during his salad days of the early 90s.

I think "god-mode" on a long-only equity portfolio with no margin/leverage probably maxes out in the high 25-29% range over 5 years in average markets.

wabuffo

And usually follows some sort of major "reset" type event.
Title: Re: Buffett's 50% per year on small sums
Post by: scorpioncapital on July 21, 2020, 05:42:01 PM
Not sure I understand. If a stock you own (or a REIT) uses 2x leverage, then do you mean that if I buy it without leverage I might get 50% due to the look-thru leverage of the stock/reit? By this standard virtually every stock out there except some cash rich tech stocks are using at least 2:1 leverage. Anyway these days every stock seems to be using alot of look-thru leverage.
Title: Re: Buffett's 50% per year on small sums
Post by: wabuffo on July 21, 2020, 06:20:25 PM
If a stock you own (or a REIT) uses 2x leverage, then do you mean that if I buy it without leverage I might get 50% due to the look-thru leverage of the stock/reit?

SC - I think you might be misinterpreting what I said.  I'm not talking about the underlying capital structure of a business whose stock you buy.  I'm talking about using borrowed money to buy the stock. 

WFC might be levered 10-to-1 on its balance sheet but buying WFC common stock is not employing borrowed money, IMO.   Buying a WFC 2022 LEAP call is employing borrowed money because that is what a call option is.  Its buying the underlying WFC common on margin plus a put option.

Hope that helps,

wabuffo
Title: Re: Buffett's 50% per year on small sums
Post by: scorpioncapital on July 22, 2020, 04:10:09 AM
I think I understand. I agree that for very large or even medium cap stocks you need some leverage for outrageous returns. Although very small stocks can very easily do 50% without any leverage, but it may be one time and require multiple 'punchcard moves'.


Title: Re: Buffett's 50% per year on small sums
Post by: samwise on July 22, 2020, 02:19:18 PM

I think "god-mode" on a long-only equity portfolio with no margin/leverage probably maxes out in the high 25-29% range over 5 years in average markets (ie, +15-20% better than the equity benchmarks). 

wabuffo

This study supports your conclusion about "God-mode". (But notice the -75% drawdown!)
https://alphaarchitect.com/2016/02/02/even-god-would-get-fired-as-an-active-investor/

It is large caps though (top 500), and weighted to large caps even within that. So scorpion is probably right that smaller caps might allow more than 30%.
Title: Re: Buffett's 50% per year on small sums
Post by: LanceSanity on July 22, 2020, 08:46:37 PM
Lance, do you have any letters or writings about their thoughts on market, portfolio selection etc?

They don't have public writings, so not much to go on. From their website:
Quote
What Abdiel does
Abdiel generally invests in publicly traded companies that are likely to gain market share over long time periods. We prefer businesses that have recurring revenue and that are managed by people with a large share of their net worth in the stock. Our ten largest investments frequently comprise more than 75% of invested capital. We started in 2006.

What we want for our investors
Returns that are good on an absolute basis and that outperform the market, measured over 3-5 years.

How we value companies
We estimate the return a company’s cash flows would deliver to someone who bought the entire business at the available stock price and held it permanently.

What we look for “under the hood” of companies
The same thing we look for in our own. Leaders who care viscerally about the quality of the products they sell. A corporate culture in which people thrive. Coincidence or not, in our experience we make more money with companies we admire than with those we don’t.

What we want Abdiel to add to the world
Work done well and with pleasure. The craftsman is a better person for his efforts, and so is anyone who notices. Moreover, good investment analysis helps companies raise the world’s standard of living. Enterprises work best when they have access to capital priced to reflect the value they can create. Index funds, by the way, do not price capital; they only mimic the actions of those who do.

whalewisdom estimates Abdiel's performance to be 53%/yr for the past 5 years. It's definitely gone up since they added more FSLY, and their stocks appreciated a lot since q1.
Title: Re: Buffett's 50% per year on small sums
Post by: netnet on July 31, 2020, 02:38:52 PM
Quote
For successful companies like Google, Apple, Microsoft the ultimate TAM is way bigger than what you expected when you invested. E.g. if you bought Apple for iPod TAM, it was overpriced (likely), but then came iPhone TAM. Same with Microsoft (DOS -> Office -> Windows, etc.)

Quote
Imagine Microsoft O/S that is growing well (30 years ago). If you value MSFT purely on O/S you will see that it is very expensive.

No and No!
I have to disagree here.

Although it was(somewhat) hard to see at the time, and perfectly obvious in hindsight, Microsoft was not expensive on just the O/S in 87.  It was order of magnitude 200 million and it was a 'tax' on a rapidly growing market--OS sales on the PC. 2 billion market cap was relatively easy to see, as these things go.  (It would of course help if you were in the industry.)
Title: Re: Buffett's 50% per year on small sums
Post by: coc on August 14, 2020, 07:28:23 AM
This thread is an amazing document to show the dominant ideologies of the moment. Some of the posts remind me quite strongly of the "New Era" in the late 60s and the Internet Mania of the 90s.  I have seen one investor after another "convert" to the New Era style (buy companies with "disruptive" nature almost regardless of price as long as a theoretical DCF justifies it).

"TAM is all that matters"
"Earnings are for LOSERS"
"Value investors have to learn to pay for growth"
etc. etc.

This time really always does seem different. We shall see!